1. What is the AAR (Average Annual Return)?

The AAR (Average Annual Return) is a percentage figure used to report historical returns of investments such as mutual funds and stocks. 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:

• Sum of Returns — Total returns over the investment period ($)
• Number of Years — Duration of the investment period (years)

Explanation: The equation calculates the average return per year by dividing the total returns by the number of years in the investment period.

3. Importance of AAR Calculation

Details: AAR provides investors with a simple way to compare the performance of different investments over time. It helps in assessing the historical performance and making informed investment decisions.

4. Using the Calculator

Tips: Enter the total returns in dollars and the number of years. Both values must be positive numbers (returns > 0, years ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between AAR and CAGR?
A: AAR calculates simple average returns, while CAGR (Compound Annual Growth Rate) accounts for compounding effects over time.

Q2: When should I use AAR vs other return metrics?
A: AAR is useful for quick comparisons, but for accurate long-term performance assessment, CAGR is generally preferred.

Q3: Can AAR be negative?
A: Yes, if the total returns are negative over the period, the AAR will also be negative, indicating average annual losses.

Q4: What are good AAR values for investments?
A: Good AAR values depend on the investment type and market conditions. Generally, higher positive returns are better, but should be compared against benchmarks and risk levels.

Q5: Does AAR account for inflation?
A: No, AAR calculates nominal returns. For real returns, inflation should be subtracted from the AAR figure.