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 ?
After controlling for the market beta, the size effect, and the book-to-market effect, the average rate of return on stocks with the greatest downside risk exceeds the average rate of return on stocks with the least downside risk by 6.
In Sweden, the average rate of return for the generation retiring 25 years after the establishment of the public pension system approached 10 percent per year; for the generation retiring 20 years later, the rate of return had dropped to 3 percent.
A 10% compounded rate of return is not the same as a 10% average rate of return, and the risk with variable life if you put in the minimum premium per illustration, barring some safety net to the contrary, is that you'll need to put in new dollars to cover the loads and expenses monthly," she said.
The event of nuclear detonation by Pakistan, on the other hand, did not have any significant effect on the average rate of return.
It then considers a minimum rate of return guarantee that is a function of the average rate of return earned by all pension funds.
The average rate of return on total farm capital investment for all farm types in New Zealand in 1996-97 was 1.
Imagine that, back in 1926, your grandparents scrimped and saved and placed $100 in a trust fund where the money would accumulate for their grandchild and that the money remained in the fund for over 70 years earning the average rate of return of the stock market.
Although relevant comparisons to private plans are difficult to construct, there is evidence that the average rate of return on state and local pension funds tends to be lower than the return realized on comparable private pension funds, other pooled investments, and market indexes.
Thus they earned an above average rate of return on the contributions they made.
The average rate of return for US manufacturers in Ireland is close to four times the EU and world average, Ms Harney added.
The average rate of return on investment made in shipping operations is under 10 per cent per annum and its own shipping operations be it liner, bulk or tanker operations do not yield a sufficient rate of return over a sustained period, to entice the prospective entrepreneur to invest his capital in shipping.

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