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 ?
(15) We also estimate Equations (5) and (6), where the dependent variables are the average rate of return in the IT and non-IT industries.
Mean value for Weighted Average Rate of Return on Deposit is 10.26 which are smaller than its median value 12.33 while standard deviation from average value is 4.65 for Weighted Average Rate of Return on Deposit.
Steel sector offers lesser average rate of return and higher average volatility when compared with the firms of chemical sector.
The average rate of return for Shanghai (0.00426) is about two and half times larger than the average rate of return for New York (0.00168).
Internal Rate of Return (IRR) and Average Rate of Return (ARR) were computed by the researcher for the analysis of the data.
The result: If an investor had oriented his share purchases according to the Twitter sentiment in the first half of 2010, he would have achieved an average rate of return of up to 15 per cent.
"For example, the trans-European networks have an average rate of return of around 8%, whereas Galileo's rate of return is estimated to be around 49%," he said.
The systems covered by the NASRA research assume an 8 percent average rate of return over a 25-year period, and in fact, the actual rate of return over the last 25 years has been 9.25 percent.
Based on the combined historical performance of the allocation of asset classes for these funds, this portfolio mix has produced an average rate of return of 9.86% per year, including two of the worst bear markets since the Great Depression, McIntosh says.
Investing in stocks can earn a better rate of return than UK banks and building societies, whose average rate of return is currently only 0.1%.
Also, the bank's average rate of return on securities has lowered and its loan-deposit rate spread has been shrinking despite its improved average interest rate on deposits.

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