Rate of Return Formula Calculator
Understanding the Rate of Return (RoR)
The Rate of Return (RoR) is a fundamental financial metric used to measure the profit or loss of an investment relative to its initial cost. It is expressed as a percentage and provides a standardized way to compare the performance of different assets, regardless of their size or type.
The Rate of Return Formula
To calculate the basic rate of return, you use the following formula:
Annualized vs. Simple Return
While a simple return tells you the total percentage gain over the entire duration, it doesn't account for time. An investment that grows 50% in one year is much better than one that grows 50% over ten years. This is where the Annualized Rate of Return (also known as Compound Annual Growth Rate or CAGR) comes in:
Practical Example
Imagine you purchased shares for $10,000. Three years later, the value of those shares is $13,500.
- Total Gain: $3,500
- Simple RoR: ($3,500 / $10,000) × 100 = 35%
- Annualized RoR: [(13,500 / 10,000) ^ (1/3)] – 1 = 10.52% per year
By using this calculator, you can quickly evaluate whether your portfolio is meeting your financial goals or if it's time to reallocate your capital.