average rate of return

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Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.

Average Rate of Return

The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment and dividing it by the number of years in the life of the investment. The average rate of return does not guarantee that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average rate of return.

average rate of return

One way of measuring an investment's profitability.To calculate,one takes the total net earnings,divides by the total number of years the investment was held,and then divides that answer by the investment's initial acquisition cost.

Example: Rainer spent $800,000 to buy an apartment building. After deducting all operat- ing expenses, real estate taxes, and insurance, she receives $65,000 in the first year, $71,000 in the second year, $69,000 in the third year, and $70,000 in the fourth year. The total net earnings are $275,000. Divide that number by the 4 years being analyzed, to reach $68,750 as an average annual return. Divide $68,750 by the initial $800,000 investment to calculate the average rate of return of 8.59 percent.

Drawback: The procedure does not take into account the time value of money.The $65,000 received in the first year was more valuable than the $70,000 received in the fourth year,because the $65,000 could have been invested to earn still more money.

References in periodicals archive ?
We use both the marginal and average rates of return for the rate of return on capital employed for our dependent variables.
It compares the range of the top and bottom quartiles for the average rates of return of large-cap value mutual funds (as tracked by Morningstar) with managed futures funds (as tracked by the Altegris 40 Index) through November 2012.
Market--community banks operating in rural markets enjoyed higher average rates of return than those in urban markets.
As a result, the CBSL has able to engage in foreign reserves management activities which have today gained wide recognition as it has been able to earn above average rates of return, during periods when the world interest rates have been at historic low levels.
During the past five years they had average rates of return of 10.
The North currently provides lower average rates of return on investment than the rest of the country.
Quarterly changes in the average rates of return for either type of buy-to-let investment are virtually unchanged at 0.
Additionally, from my own personal experience, women tend to invest more conservatively than men, which greatly lowers the average rates of return on their investments and, in the end, their retirement savings.
It then shows why stocks, with their higher average rates of return, tend to perform better over sufficiently long holding periods.
Firms with positive profitability trends have a greater probability of issuing bonds with covenant packages that have lower levels of protection than firms with lower average rates of return.
Martin and Petty (1983) reported average rates of return of 27 percent for publicly traded venture capital companies from 1974-1979.