Simple Rate of Return Calculation Formula

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Simple Rate of Return Calculator

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What is the Simple Rate of Return?

The Simple Rate of Return (also known as Simple Return on Investment or ROI) is a straightforward method to calculate the profitability of an investment over a specific period. It measures the percentage gain or loss relative to the initial amount invested. This metric is fundamental for investors to quickly assess how well their investment has performed without considering the effects of compounding or the time value of money in a complex way.

How to Calculate Simple Rate of Return

The formula is as follows:

Simple Rate of Return = ((Final Investment Value – Initial Investment Value) / Initial Investment Value) * 100

If you want to annualize this return, you can divide the simple rate of return by the time period in years:

Annualized Simple Rate of Return = (Simple Rate of Return) / (Time Period in Years)

Key Components:

  • Initial Investment Value: The total amount of money initially put into the investment.
  • Final Investment Value: The total value of the investment at the end of the period.
  • Time Period: The duration over which the investment was held, usually expressed in years.

Benefits of Simple Rate of Return:

  • Simplicity: It's easy to understand and calculate.
  • Quick Assessment: Provides a rapid overview of investment performance.

Limitations:

  • Ignores Compounding: It does not account for the effect of reinvesting earnings.
  • Time Value of Money: It doesn't inherently factor in that money today is worth more than money in the future.
  • Short-Term Focus: Best suited for evaluating returns over shorter periods.

Example Calculation:

Let's say you invested $1,000 (Initial Investment Value) in a stock. After 2 years (Time Period), the stock's value has grown to $1,300 (Final Investment Value).

  • Step 1: Calculate the total profit: $1,300 – $1,000 = $300
  • Step 2: Calculate the simple rate of return: ($300 / $1,000) * 100 = 30%
  • Step 3: Calculate the annualized simple rate of return: 30% / 2 years = 15% per year

This means your investment yielded a 30% return over two years, averaging 15% annually.

function calculateSimpleRateOfReturn() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var finalValue = parseFloat(document.getElementById("finalValue").value); var timePeriod = parseFloat(document.getElementById("timePeriod").value); var resultDiv = document.getElementById("result"); if (isNaN(initialInvestment) || isNaN(finalValue) || isNaN(timePeriod)) { resultDiv.innerHTML = "Please enter valid numbers for all fields."; return; } if (initialInvestment === 0) { resultDiv.innerHTML = "Initial investment cannot be zero."; return; } if (timePeriod <= 0) { resultDiv.innerHTML = "Time period must be greater than zero."; return; } var profit = finalValue – initialInvestment; var simpleRateOfReturn = (profit / initialInvestment) * 100; var annualizedSimpleRateOfReturn = simpleRateOfReturn / timePeriod; var resultHTML = "Total Profit/Loss: " + profit.toFixed(2) + ""; resultHTML += "Simple Rate of Return: " + simpleRateOfReturn.toFixed(2) + "%"; resultHTML += "Annualized Simple Rate of Return: " + annualizedSimpleRateOfReturn.toFixed(2) + "% per year"; resultDiv.innerHTML = resultHTML; }

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