average rate of return

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Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
Perhaps more importantly to those who think universities should operate even more like businesses than they already do, scholars are finding that average rates of return from commercialization--even at universities with the highest licensing income--are relatively low.
We use both the marginal and average rates of return for the rate of return on capital employed for our dependent variables.
This means that funds with higher average rates of return are characterized with a higher risk represented by the standard deviation of a fund's rates of return.
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* Market--community banks operating in rural markets enjoyed higher average rates of return than those in urban markets.
During the past five years they had average rates of return of 10.92% on properties that they owned outright, and 21.07% on ones that they had a mortgage on.
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 0.06 per cent and 0.15 per cent.
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.