1. What is Average Annual Return?

Average Annual Return (AAR) is a percentage figure that shows the geometric average amount of money earned by an investment each year over a given time period. It represents the average return an investor earns over a multi-year period.

2. How Does the Calculator Work?

The calculator uses the AAR formula:

Where:

• \( TR \) — Total return (expressed as a decimal)
• \( n \) — Number of years

Explanation: The formula calculates the simple average return per year by dividing the total return by the number of years and converting it to a percentage.

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.

4. Using the Calculator

Tips: Enter total return as a decimal (e.g., 0.5 for 50% return) and the number of years the investment was held. Both values must be valid (total return ≥ 0, years ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between AAR and CAGR?
A: AAR calculates simple average return, while CAGR (Compound Annual Growth Rate) accounts for compounding effects and provides a more accurate measure of growth over time.

Q2: When should I use AAR instead of other return metrics?
A: AAR is useful for quick comparisons and simple return calculations, but for investments with volatility, CAGR or other risk-adjusted metrics may be more appropriate.

Q3: Does AAR account for investment risk?
A: No, AAR only measures average return and doesn't consider the volatility or risk associated with achieving those returns.

Q4: Can AAR be negative?
A: Yes, if the total return is negative, the AAR will also be negative, indicating an average annual loss.

Q5: What are good AAR values for different asset classes?
A: Historical averages vary: stocks ~7-10%, bonds ~3-5%, real estate ~4-8%, but these vary significantly based on market conditions and time periods.