Average Rate of Return Calculator
Understanding Average Rate of Return
The Average Rate of Return (ARR) is a profitability metric used in finance to estimate the annual return that an investment is expected to generate over its lifespan. It's a straightforward way to gauge the efficiency of an investment and compare different investment opportunities. The ARR is particularly useful for longer-term investments where visualizing the yearly gain is important.
How to Calculate the Average Rate of Return
The formula for calculating the Average Rate of Return is as follows:
ARR = ((Final Investment Value - Initial Investment Value) / Initial Investment Value) / Time Period * 100
Where:
- Initial Investment Value: The starting amount invested.
- Final Investment Value: The value of the investment at the end of the period.
- Time Period: The duration of the investment in years.
Example Calculation
Let's say you invested $10,000 (Initial Investment Value) in a stock. After 5 years (Time Period), the value of your investment grew to $12,000 (Final Investment Value).
Using the formula:
ARR = (($12,000 - $10,000) / $10,000) / 5 * 100
ARR = ($2,000 / $10,000) / 5 * 100
ARR = 0.20 / 5 * 100
ARR = 0.04 * 100
ARR = 4%
In this example, the Average Rate of Return is 4% per year.
Why is ARR Important?
The Average Rate of Return helps investors understand the potential profitability of an investment on an annualized basis. It simplifies the comparison of investments with different time horizons and initial costs, providing a common metric for decision-making. While it doesn't account for the time value of money or potential risks, it serves as a fundamental tool for initial investment analysis.
function calculateAverageRateOfReturn() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var finalInvestment = parseFloat(document.getElementById("finalInvestment").value);
var timePeriod = parseFloat(document.getElementById("timePeriod").value);
var resultDiv = document.getElementById("result");
if (isNaN(initialInvestment) || isNaN(finalInvestment) || isNaN(timePeriod) || initialInvestment <= 0 || timePeriod <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var totalReturn = finalInvestment – initialInvestment;
var rateOfReturn = (totalReturn / initialInvestment);
var averageRateOfReturn = (rateOfReturn / timePeriod) * 100;
resultDiv.innerHTML = "Total Gain: $" + totalReturn.toFixed(2) + "" +
"Total Rate of Return: " + rateOfReturn.toFixed(2) + "%" +
"
Average Rate of Return (per year): " + averageRateOfReturn.toFixed(2) + "%";
}
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