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Business Definition for: average rate of return
Dictionary of Accounting Terms
average rate of return
See also simple rate of return
Dictionary of Finance and Investment Terms
average rate of return

  1. Investments: arithmetic average of the annual returns of two or more investments.
  2. Corporate finance: abbreviated ARR, ratio of the average cash inflow to the amount invested.

See also rate of return
Dictionary of Real Estate Terms
average rate of return

a measure of an investment's profitability. Total net earnings are divided by the number of years the investment was held, then by the investment's initial acquisition cost , to derive the annual income rate. A drawback is that it does not consider the timing of earnings.

Example: An investment's initial cost was $100. It paid a $2 annual dividend and was sold after five years for $150. The total return is $60 ($10 in dividends plus $50 in gain). The $60 earned over five years represents $12 per year, which is a 12% average rate of return.

Related Terms:
simple rate of return

measure of profitability obtained by dividing the expected future annual net income by the required investment; also called accounting rate of return or unadjusted rate of return. Sometimes the average investment rather than the original initial investment is used as the required investment, which is called average rate of return. For example, consider the following investment:

Initial investment $6500
Estimated life 20 years
Expected annual net income $675

Then the simple rate of return is $675/$6500 = 10.4%. Using the average investment, which is usually assumed to be one-half of the original investment, the average rate of return will be doubled as follows:

$675
$6500/2		 = $675
$3250		 × = 20.8%
rate of return

Fixed-income securities (bonds and preferred stock): current yield, that is, the coupon or contractual dividend rate divided by the purchase price. see also yield to average life ;yield to call;Yield To Maturity
Common stock: (1) dividend yield, which is the annual dividend divided by the purchase price. (2) total return rate, which is the dividend and other distributions plus capital appreciation.
Corporate finance: return on equity or return on invested capital
Capital budgeting: Internal Rate of Return

Copyright © 2005, 2000, 1995, 1987 by Barron's Educational Series, Inc., Reprinted by arrangement with Publisher.
 Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
 Copyright © 2004, 2000, 1997, 1993, 1987, 1984 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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