What is the average return rate?
The average return rate is a financial term concerning the average amount of money earned or lost over time compared to the amount invested. It is also commonly called return on investment (ROI) and is usually expressed as a percentage, which represents a total profit or loss compared to the initial capital. Because it basically shows what kind of profit to be expected, the average return rate is a key part in any investment strategy.
There are two basic ways of calculating the average payback rate - one that is limited to short -term estimates and the other, which is more suitable for longer -term projections. The arithmetic average provides an average short -term return speed, while what is called geometric diameter is used for rates with longer -term horizon. It contains a variable for a given number of years and can therefore be used to project into the future.
ARITMET Calculates for the futureThe average rate of return, the less accurate becomes. This irregularity occurs because, unlike the geometric diameter of the arithmetic mean value, it does not take into account the same positive and negative earnings as they go through. For example, if the average return rate of capital worth USD worth USD (USD) in two years, it is 25% in the first year and is -25% in the second year, the arithmetic result will be $ 37.5, which is incorrect. The use of a geometric formula provides the correct $ 50 result because the amount of the initial investment has never changed.
Although formulas for calculating the average payback rate are somewhat complex, the results are relatively easy to interpret. The rate will represent the percentage of capital either obtained or lost. The percentage greater than zero indicates profit, while the number less than zero indicates the loss.
NEITHER Method of the average return rate is completely complex and both report certain prerequisites concerning market and economic conditions.With regard to these assumptions, however, they can offer instructions on everything from personal finances to main corporate and business transactions. Mutual fund or similar investment program often offers potential investors who include statistics such as historical and expected future average return levels. Consumers can use this as a comparative tool for estimated profitability when selecting between different funds. Since they offer results in relative percentage, the same equations can be used to estimate profits and cash flows associated with the acquisition of entire companies.