What is the Annual Rate of Return?
The Annual Rate of Return (ARR), often simply called the rate of return, is a metric used to measure the profitability of an investment over a specific period. It represents the percentage gain or loss on an investment relative to its initial cost. A positive rate of return indicates that the investment has generated profit, while a negative rate of return signifies a loss.
The formula for calculating the annual rate of return is:
ARR = [ (Final Investment Value - Initial Investment Amount) / Initial Investment Amount ] / Time Period (in years) * 100%
Why is it Important?
Understanding your ARR is crucial for several reasons:
- Performance Measurement: It allows you to compare the performance of different investments.
- Decision Making: It helps in making informed decisions about where to allocate your capital.
- Goal Setting: It assists in setting realistic financial goals and tracking progress towards them.
- Inflation Comparison: You can compare your ARR to inflation rates to see if your investment is growing in real terms.
Example Calculation:
Let's say you invested $10,000 (Initial Investment Amount) in a stock. After 2 years (Time Period), the value of your investment has grown to $12,000 (Final Investment Value).
- Gain = $12,000 – $10,000 = $2,000
- Total Return = ($2,000 / $10,000) * 100% = 20%
- Annual Rate of Return = (20% / 2 years) = 10% per year
This means your investment yielded an average annual return of 10% over the two-year period.
function calculateAnnualRateOfReturn() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var finalInvestment = parseFloat(document.getElementById("finalInvestment").value);
var timePeriod = parseFloat(document.getElementById("timePeriod").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous results
if (isNaN(initialInvestment) || isNaN(finalInvestment) || isNaN(timePeriod)) {
resultElement.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (initialInvestment <= 0) {
resultElement.innerHTML = "Initial Investment must be greater than zero.";
return;
}
if (timePeriod <= 0) {
resultElement.innerHTML = "Time Period must be greater than zero.";
return;
}
var totalGain = finalInvestment – initialInvestment;
var totalReturnPercentage = (totalGain / initialInvestment) * 100;
var annualRateOfReturn = totalReturnPercentage / timePeriod;
resultElement.innerHTML = "
Annual Rate of Return: " + annualRateOfReturn.toFixed(2) + "%";
}
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