Rate of Return (RoR) Calculator
Calculate your simple and annualized investment performance.
Investment Performance Summary
Understanding Investment Rate of Return
The Rate of Return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment's initial cost. When evaluating the efficiency of an investment, understanding both the absolute profit and the annualized growth is crucial for comparing different asset classes.
Total Return vs. Annualized Return
Total Return measures the overall performance of an investment from start to finish. It includes capital gains (the increase in price) plus any dividends or interest received. However, it does not account for how long it took to achieve those gains.
Annualized Return (CAGR), or Compound Annual Growth Rate, provides the geometric progression ratio that provides a constant rate of return over the time period. This is the most accurate way to compare a 5-year stock investment against a 1-year bond or a savings account, as it "levels the playing field" by showing what the investment earned each year on average.
The Mathematical Formula
To calculate the Annualized Rate of Return, we use the following formula:
Annualized RoR = [(Ending Value / Initial Value) ^ (1 / Years)] – 1
Example Calculation
Suppose you invest $10,000 in a mutual fund. After 3 years, the investment is worth $13,000, and you received $500 in dividends over that period.
- Initial Investment: $10,000
- Final Value: $13,500 (Ending Value + Dividends)
- Total Return: 35%
- Annualized Return (CAGR): 10.52%
This means that while your total money grew by 35% over three years, your money effectively grew at an average rate of 10.52% compounded annually.
Why Monitoring RoR Matters
Investors use the Rate of Return to determine if an investment is meeting their financial goals. If a high-risk investment provides a lower RoR than a low-risk "risk-free" asset (like a US Treasury bond), the investor is not being properly compensated for the risk they are taking. By calculating the annualized rate, you can better decide where to allocate your capital for the highest efficiency.