Rate of Return (RoR) Calculator
Understanding the Rate of Return Calculation Formula
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. It is the primary metric used by investors to determine the efficiency of an investment or to compare the performance of different asset classes like stocks, bonds, or real estate.
The Basic Rate of Return Formula
To calculate the simple rate of return, you subtract the initial value from the current value and divide that figure by the initial value.
Annualized Rate of Return (CAGR)
While the simple RoR tells you how much you made in total, it doesn't account for time. The Annualized Rate of Return (often called Compound Annual Growth Rate or CAGR) provides the geometric progression ratio that provides a constant rate of return over the time period.
Practical Examples
Example 1: Short-term Stock Gain
If you bought shares for $5,000 and sold them a year later for $6,000, your total gain is $1,000. Using the formula: ($1,000 / $5,000) * 100 = 20% RoR.
Example 2: Long-term Investment
If you invested $10,000 in a mutual fund and 5 years later it is worth $20,000, your total RoR is 100%. However, your annualized RoR (CAGR) would be approximately 14.87%, showing how the investment grew on average each year.
Why Monitoring RoR Matters
- Benchmarking: Compare your portfolio performance against indexes like the S&P 500.
- Inflation Adjustment: Determine if your investments are actually gaining purchasing power.
- Risk Assessment: High rates of return often correlate with higher volatility and risk.