Rate of Return Calculator
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Understanding the Rate of Return (RoR)
The Rate of Return (RoR) is a fundamental metric used to evaluate the profitability of an investment over a specific period. It essentially tells you how much money you've made or lost relative to your initial investment. A positive RoR indicates a profit, while a negative RoR signifies a loss.
The Formula for Rate of Return
The basic formula to calculate the Rate of Return is as follows:
RoR = ((Final Value – Initial Investment) / Initial Investment) * 100%
This formula provides the total percentage gain or loss on an investment. However, for investments held over multiple periods, it's often useful to annualize the return.
Annualized Rate of Return
When an investment is held for more than one year, we often want to know the average annual return. This is particularly useful for comparing investments with different holding periods. The formula for the Annualized Rate of Return (also known as Compound Annual Growth Rate or CAGR) is:
Annualized RoR = ((Final Value / Initial Investment) ^ (1 / Number of Years)) – 1
This calculation smooths out volatility and provides a representative yearly growth rate.
How to Use This Calculator
This calculator helps you quickly determine both the simple and annualized rate of return for your investments.
- Initial Investment: Enter the total amount of money you initially put into the investment.
- Final Value: Enter the total value of the investment at the end of the period you are evaluating. This includes any gains, dividends, or capital appreciation.
- Time Period (in years): Enter the duration of the investment in years. If you are calculating the return for a period less than a year, you can express it as a decimal (e.g., 0.5 for 6 months).
Once you input these values and click "Calculate Rate of Return", the calculator will display the simple percentage return and the annualized rate of return.
Example Calculation
Let's say you invested $10,000 (Initial Investment) in a stock. After 3 years (Time Period), the value of your investment has grown to $15,000 (Final Value).
Simple Rate of Return:
((15000 – 10000) / 10000) * 100% = (5000 / 10000) * 100% = 0.5 * 100% = 50%
Annualized Rate of Return:
((15000 / 10000) ^ (1 / 3)) – 1 = (1.5 ^ 0.3333) – 1 ≈ 1.1447 – 1 ≈ 0.1447 or 14.47%
This means your investment grew by a total of 50% over three years, averaging an annual return of approximately 14.47%.