Average Rate Of Return Definition

An average rate of return is the mean percentage profit or loss earned on an investment over a specified period of time. It is calculated by adding up all the capital gains and losses earned on an investment and dividing them by the number of years the investment was held. The average rate of return can be a useful tool when comparing different investments.

When calculating the average rate of return, it is important to use a consistent time frame. For example, if you are comparing two investments, one that was held for five years and one that was held for 10 years, it would not be fair to compare their average rates of return without taking into account how long each investment was held. In general, investments that are held for longer periods of time tend to have higher average rates of return than those that are held for shorter periods of time.

It is also important to note that the average rate of return does not take into account the risk involved in an investment. For example, two investments could have the same average rate of return but one could be much riskier than the other. When considering which investment to choose, it is important to consider both the potential return and the risk involved.