Average Annual Rate Of Return Calculator

Average Annual Return Formula:

\[ AAR = \left( \left( \frac{\text{End Value}}{\text{Start Value}} \right)^{\frac{1}{\text{years}}} - 1 \right) \times 100 \]

Average Annual Return (AAR):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Average Annual Return (AAR)?

Average Annual Return (AAR) is a percentage that shows the geometric average amount of money earned by an investment each year over a given time period. It provides a smoothed annualized return figure that accounts for compounding effects.

2. How Does the Calculator Work?

The calculator uses the AAR formula:

\[ AAR = \left( \left( \frac{\text{End Value}}{\text{Start Value}} \right)^{\frac{1}{\text{years}}} - 1 \right) \times 100 \]

Where:

\( \text{End Value} \) — Final investment value in currency
\( \text{Start Value} \) — Initial investment value in currency
\( \text{years} \) — Investment period in years

Explanation: The formula calculates the geometric mean return, which accounts for compounding and provides a more accurate representation of investment performance than simple arithmetic average.

3. Importance of AAR Calculation

Details: AAR is crucial for comparing investment performance across different time periods and asset classes. It helps investors understand the compounded growth rate of their investments and make informed decisions about portfolio allocation.

4. Using the Calculator

Tips: Enter the starting value and ending value in your preferred currency, and the investment period in years. All values must be positive numbers. The calculator will compute the average annual return as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AAR and CAGR?
A: AAR (Average Annual Return) and CAGR (Compound Annual Growth Rate) are often used interchangeably, but AAR typically refers to the geometric mean return while CAGR specifically measures the smoothed annual growth rate.

Q2: Why use geometric mean instead of arithmetic mean?
A: Geometric mean accounts for compounding effects and volatility, providing a more accurate representation of investment performance over time.

Q3: Can AAR be negative?
A: Yes, if the investment loses value over the period, AAR will be negative, indicating an average annual loss.

Q4: How does AAR handle irregular cash flows?
A: This calculator assumes no intermediate cash flows. For investments with regular contributions or withdrawals, other metrics like IRR (Internal Rate of Return) may be more appropriate.

Q5: What are typical AAR ranges for different asset classes?
A: Stocks typically range 7-10%, bonds 3-5%, real estate 4-8%, but these vary significantly based on market conditions and time period.