Investment Rate of Return Calculator
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Understanding Investment Rate of Return
The Investment Rate of Return (RoR) is a key metric used to evaluate the profitability of an investment. It measures the gain or loss on an investment over a specific period, expressed as a percentage of the initial investment amount. A positive RoR indicates a profitable investment, while a negative RoR signifies a loss.
How to Calculate Rate of Return
The basic formula for calculating the Rate of Return is:
Rate of Return = ((Final Value of Investment – Initial Investment Amount) / Initial Investment Amount) * 100
This formula gives you the total return over the entire holding period.
Calculating Annualized Rate of Return
For investments held over different time periods, it's often more useful to calculate the annualized rate of return. This helps in comparing investments with different durations on an equal footing. The formula for annualized RoR is:
Annualized Rate of Return = ((Final Value of Investment / Initial Investment Amount)^(1 / Time Period) – 1) * 100
Example Calculation
Let's say you invested $10,000 (Initial Investment) in a stock. After 2 years (Time Period), the value of your investment grew to $12,000 (Final Value of Investment).
Total Rate of Return:
((12,000 – 10,000) / 10,000) * 100 = (2,000 / 10,000) * 100 = 0.2 * 100 = 20%
This means your investment grew by 20% over the two years.
Annualized Rate of Return:
((12,000 / 10,000)^(1 / 2) – 1) * 100 = (1.2^(0.5) – 1) * 100 = (1.0954 – 1) * 100 = 0.0954 * 100 = 9.54% (approximately)
This indicates an average annual growth rate of approximately 9.54% for your investment.
Importance of Rate of Return
Understanding and calculating the rate of return is fundamental for any investor. It allows you to:
- Measure investment performance.
- Compare different investment opportunities.
- Make informed decisions about future investments.
- Track progress towards financial goals.