Financial Modeling Tutorials
 Financial Modeling Basics
 Excel Modeling
 Financial Functions in Excel
 Sensitivity Analysis in Excel
 Sensitivity Analysis
 Capital Budgeting Techniques
 Time Value of Money
 Future Value Formula
 Present Value Factor
 Perpetuity Formula
 Present Value vs Future Value
 Annuity vs Pension
 Present Value of an Annuity
 Doubling Time Formula
 Annuity Formula
 Annuity vs Perpetuity
 Annuity vs Lump Sum
 Deferred Annuity Formula
 Internal Rate of Return (IRR)
 IRR Examples (Internal Rate of Return)
 NPV vs XNPV
 NPV vs IRR
 NPV Formula
 NPV Profile
 NPV Examples
 PV vs NPV
 IRR vs ROI
 Break Even Point
 Payback Period & Discounted Payback Period
 Payback period Formula
 Discounted Payback Period Formula
 Profitability Index
 Cash Burn Rate
 Simple Interest
 Simple Interest vs Compound Interest
 Simple Interest Formula
 CAGR Formula (Compounded Annual Growth Rate)
 Effective Interest Rate
 Loan Amortization Schedule
 Mortgage Formula
 Loan Principal Amount
 Interest Rate Formula
 Rate of Return Formula
 Effective Annual Rate
 Effective Annual Rate Formula (EAR)
 Daily Compound Interest
 Monthly Compound Interest Formula
 Discount Rate vs Interest Rate
 Rule of 72
 Geometric Mean Return
 Real Rate of Return Formula
 Continuous compounding Formula
 Weighted average Formula
 Average Formula
 Average Rate of Return Formula
 Mean Formula
 Mean Examples
 Population Mean Formula
 Weighted Mean Formula
 Harmonic Mean Formula
 Median Formula in Statistics
 Range Formula
 Outlier Formula
 Decile Formula
 Midrange Formula
 Quartile Deviation
 Expected Value Formula
 Exponential Growth Formula
 Margin of Error Formula
 Decrease Percentage Formula
 Percent Error Formula
 Holding Period Return Formula
 Cost Benefit Analysis
 Cost Benefit Analysis Examples
 Cost Volume Profit Analysis
 Opportunity Cost Formula
 Opportunity Cost Examples
 Mortgage APR vs Interest Rate
 Normal Distribution Formula
 Standard Normal Distribution Formula
 Normalization Formula
 Bell Curve
 T Distribution Formula
 Regression Formula
 Regression Analysis Formula
 Multiple Regression Formula
 Correlation Coefficient Formula
 Correlation Formula
 Population Variance Formula
 Covariance Formula
 Coefficient of Variation Formula
 Sample Standard Deviation Formula
 Relative Standard Deviation Formula
 Standard Deviation Formula
 Volatility Formula
 Binomial Distribution Formula
 Quartile Formula
 P Value Formula
 Skewness Formula
 R Squared Formula
 Adjusted R Squared
 Regression vs ANOVA
 Z Test Formula
 FTest Formula
 Quantitative Research
Related Courses
What is Average Rate of Return?
The term “average rate of return” refers to the percentage rate of return that is expected on an investment or asset visàvis the initial investment cost or average investment over the life of the project. The formula for average rate of return is derived by dividing the average annual net earnings after taxes or return on the investment by the original investment or the average investment during the life of the project and then expressed in terms of percentage.
Average Rate of Return Formula
Mathematically, it is represented as,
or
Explanation of the Average Rate of Return Formula
The formula for the calculation of the average return can be obtained by using the following steps:
Step 1: Firstly, determine the earnings from an investment, say stock, options etc, for a significant period of time, say five years. Now, calculate the average annual return by dividing the summation of the earnings by the no. of years considered.
Step 2: Next, in case of onetime investment, determine the initial investment in the asset. In the case of regular investments, the average investment over life is captured.
Step 3: Finally, the calculation of the average return is done by dividing the average annual return (step 1) by initial investment in the asset (step 2). It can also be derived by dividing the average annual return by average investment in the asset and then expressed in terms of percentage as shown above.
Examples of Average Rate of Return Formula (with Excel Template)
Let’s see some simple to advanced examples for the calculation of Average Return Formula to understand it better.
Example #1
Let us take the example of real estate investment that is likely to generate returns of $25,000 in Year 1, $30,000 in Year 2 and $35,000 in Year 3. The initial investment is $350,000 with a salvage value of $50,000 and estimated life of 3 years. Do the Calculation the Avg rate of return of the investment based on the given information.
Average annual earnings of the real estate investment can be calculated as,
Average annual return = Sum of earnings in Year 1, Year 2 and Year 3 / Estimated life
4.9 (927 ratings)
= ($25,000 + $30,000 + $35,000) / 3
= $30,000
Therefore, the calculation of average rate of return of the real estate investment will be as follows,
 Average return = = $30,000 / ($350,000 – $50,000) * 100%
Average Rate of Return will be –
 Average return= 10.00%
Therefore, the average rate of return of the real estate investment is 10.00%.
Example #2
Let us take an example of an investor who is considering two securities of a comparable risk level to include one of them in his portfolio. Determine which security should be selected based on the following information:
Average annual earnings for security A can be calculated as,
Average annual earnings _{A }= Sum of earnings in Year 1, Year 2 and Year 3 / Estimated life
= ($5,000 + $10,000 + $12,000) / 3
= $9,000
The calculation of average rate of return of Stock A can be done as follows,
 Avg return _{A} = $9,000 / $50,000 * 100%
Average Rate of Return for Stock A
 Average return = 18.00%
Average annual earnings for security B can be calculated as,
Average annual earnings _{B }= ($7,000 + $12,000 + $14,000) / 3
= $11,000
The calculation of Average rate of return for Stock B can be done as follows,
 Average return _{B} = $11,000 / $65,000 * 100%
Average Return for Stock B will be –
 Average return for security B = 16.92%
Based on the given information, Security A should be preferred for the portfolio because of its higher average return than that of Security B.
Average Rate of Return Calculator
You can use the following Average Rate of Return Calculator.
Average Annual Net Earnings After Taxes  
Initial Investment  
Average Rate of Return Formula =  
Average Rate of Return Formula = 



Relevance and Use
It is important to understand the concept of the average rate of return as it is used by investors to make decisions based on the likely amount of return expected from an investment. Based on this, an investor can decide whether to enter into an investment or not. Further, investors use this return for ranking the assets and eventually make the investment as per the ranking and include them in the portfolio.
In cases of projects, an investor uses the metric to check whether or not the average rate of return is higher than the required rate of return, which is a positive signal for the investment. Again, for mutually exclusive projects, an investor accepts the one with the highest return. In short, the higher the return, the better is the asset.
Recommended Articles
This has been a guide to what is Average Rate of Return. Here we discuss how to calculate the Average Rate of Return and its formula along with practical examples and downloadable excel template. You can learn more about Accounting from the following articles –
 Nominal Rate of Return
 Margin of Error Calculator
 Calculate the Rate of Return Formula
 Examples of Percent Error Formula
 Alpha Formula Example
 Expected Return Formula Example
 Hurdle Rate Calculation
 Holding Period Return Formula Example
 35+ Courses
 120+ Hours of Videos
 Full Lifetime Access
 Certificate of Completion
 Basic Microsoft Excel Training
 MS Excel 2010 Training Course: Advanced
 Microsoft Excel Basic Training
 Microsoft Excel 2013 – Advanced
 Microsoft Excel 2016 – Beginners
 Microsoft Excel 2016 – Advanced