1. What is Average Annual Return?

Average Annual Return (AAR) is the arithmetic mean of the yearly returns of an investment over a specified period. It represents the average amount of money earned by an investment each year over a given time period.

2. How Does the Calculator Work?

The calculator uses the AAR formula:

Where:

• \( \text{Ending Value} \) — Final value of the investment
• \( \text{Beginning Value} \) — Initial value of the investment
• \( n \) — Number of years

Explanation: The formula calculates the geometric average return, which accounts for compounding effects over multiple periods.

3. Importance of AAR Calculation

Details: AAR helps investors compare the performance of different investments over time, assess investment strategies, and make informed decisions about portfolio allocation and risk management.

4. Using the Calculator

Tips: Enter the beginning and ending values in dollars, and the number of years. All values must be positive numbers (ending value > 0, beginning value > 0, years ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between AAR and CAGR?
A: AAR is the arithmetic mean of annual returns, while CAGR (Compound Annual Growth Rate) is the geometric mean. CAGR is generally more accurate for long-term investments.

Q2: What is considered a good AAR?
A: A good AAR depends on the asset class and risk profile. Generally, 7-10% is considered good for stock investments, while 2-4% is typical for bonds.

Q3: Does AAR account for volatility?
A: No, AAR does not account for the volatility or risk of returns. Two investments with the same AAR can have very different risk profiles.

Q4: When should I use AAR vs other return measures?
A: Use AAR for comparing investments with similar risk profiles over the same time period. For more comprehensive analysis, consider using risk-adjusted measures like Sharpe ratio.

Q5: Can AAR be negative?
A: Yes, AAR can be negative if the investment lost value over the period, indicating an average annual loss.