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AARR Formula:
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The Average Annual Rate of Return (AARR) is a simple arithmetic mean that calculates the average return percentage over multiple years. It provides a straightforward measure of investment performance by averaging annual returns without considering compounding effects.
The calculator uses the AARR formula:
Where:
Explanation: This formula calculates the simple average of annual returns, making it easy to understand and interpret investment performance over time.
Details: AARR is commonly used for quick performance comparisons, portfolio analysis, and investment decision-making. It helps investors understand the average yearly performance of their investments over a specific period.
Tips: Enter annual returns as comma-separated percentage values (e.g., "12, 15, -5, 20"). The calculator will automatically compute the average and display the result as a percentage.
Q1: What is the difference between AARR and CAGR?
A: AARR calculates simple average return, while CAGR (Compound Annual Growth Rate) accounts for compounding effects. CAGR is generally more accurate for long-term performance measurement.
Q2: When should I use AARR instead of other return measures?
A: Use AARR for quick comparisons and when annual returns are relatively stable. For volatile returns or long-term investments, consider using CAGR.
Q3: What are typical AARR values for different investments?
A: Stock market investments typically range from 7-10%, bonds 3-5%, while savings accounts are usually 1-2%. Actual returns vary based on market conditions and investment strategy.
Q4: Can AARR be negative?
A: Yes, if the investment experiences losses in some years, the average annual return can be negative, indicating an overall loss over the period.
Q5: What are the limitations of AARR?
A: AARR doesn't account for compounding, volatility, or the sequence of returns. It may overestimate or underestimate true performance in volatile markets.