Rate of Return Calculator
Understanding Rate of Return
The Rate of Return (RoR) is a performance measure used to evaluate the efficiency of an investment. It quantifies the gain or loss on an investment over a specific period, expressed as a percentage of the initial investment's cost. A positive RoR indicates a profitable investment, while a negative RoR signifies a loss.
The formula for calculating the Rate of Return is:
RoR = [(Final Value – Initial Investment) + Income Generated] / Initial Investment
To express this as a percentage, you multiply the result by 100.
- Initial Investment: This is the total amount of money you initially put into the investment.
- Final Value: This is the value of the investment at the end of the period (e.g., the selling price if you sold it, or its current market value).
- Income Generated: This includes any additional income received from the investment during the holding period, such as dividends from stocks, interest from bonds, or rental income from property.
A higher Rate of Return generally indicates a more successful investment. It's crucial to compare the RoR of different investments to make informed financial decisions.
Example:
Let's say you invested $10,000 (Initial Investment) in a stock. After one year, you sell the stock for $11,500 (Final Value), and during that year, you received $300 in dividends (Income Generated).
Using the formula: RoR = [($11,500 – $10,000) + $300] / $10,000 RoR = [$1,500 + $300] / $10,000 RoR = $1,800 / $10,000 RoR = 0.18
As a percentage, the Rate of Return is 0.18 * 100 = 18%. This means your investment grew by 18% over the year.