Dictionary of Finance and Investment Terms: average rate of return
average rate of return
- Investments: arithmetic average of the annual returns of two or more investments.
- Corporate finance: abbreviated ARR, ratio of the average cash inflow to the amount invested.
Dictionary of Real Estate Terms: average rate of return
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.
