Rate of Return (RoR) Calculator
How Do You Calculate the Rate of Return?
The Rate of Return (RoR) is the net gain or loss of an investment over a specific time period, expressed as a percentage of the investment's initial cost. It is the primary metric used by investors to determine the efficiency and profitability of their assets, whether they are stocks, bonds, real estate, or business ventures.
The Basic Rate of Return Formula
To calculate the simple rate of return, you need three main variables: the initial value of the asset, the current (or final) value, and any income generated during the period (like dividends or interest). The formula is as follows:
Understanding Annualized Returns (CAGR)
While the simple rate of return tells you how much you made in total, the Annualized Return (or Compound Annual Growth Rate) helps you understand how the investment performed on a yearly basis. This is crucial for comparing a 5-year investment to a 10-year investment.
The formula for annualized return is:
Where 'n' represents the number of years the investment was held.
Practical Example
Suppose you invested $5,000 in a stock. Two years later, the stock is worth $6,000, and you received $200 in dividends during that time.
- Step 1: Calculate Total Gain. ($6,000 + $200) – $5,000 = $1,200.
- Step 2: Calculate Simple RoR. ($1,200 / $5,000) * 100 = 24%.
- Step 3: Calculate Annualized RoR. Over 2 years, a 24% total return equates to approximately 11.36% per year when compounded.
Why Monitoring Your RoR Matters
Calculating your rate of return allows you to compare different asset classes against benchmarks, such as the S&P 500. It also helps in identifying underperforming assets in your portfolio that may need to be sold (divested) to free up capital for better opportunities.