AVERAGE ANNUAL TOTAL RETURN Meaning and
Definition
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Average annual total return is a financial term that refers to the average rate of return earned by an investment or portfolio over a specific period of time, usually calculated on an annual basis. It measures the overall performance of an investment by taking into account the annual growth or decline in its value, as well as any income generated from dividends or interest.
To calculate the average annual total return, the investment's total return over a specified period is divided by the number of years in that period. It is expressed as a percentage, representing the average annual increase or decrease in the investment's value.
The concept of average annual total return is widely used in evaluating the performance of investment funds, such as mutual funds or exchange-traded funds (ETFs). It enables investors to assess the long-term profitability or loss potential of an investment, taking into account both capital appreciation and income. By using this measure, investors can compare the performance of different investments or funds over the same time frame, facilitating informed decision-making.
It is important to note that average annual total return does not guarantee future performance, as investments can fluctuate in value and are subject to market risks. However, it offers a useful metric to assess the historical returns of an investment and provides a basis for comparison among various investment options.
