Understanding and Calculating Rate of Return
The 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 cost. Understanding your RoR helps you compare different investment opportunities and assess the performance of your portfolio.
How to Calculate Rate of Return
The basic formula for calculating the Rate of Return is:
RoR = [(Ending Value – Beginning Value) / Beginning Value] * 100
Alternatively, if you are accounting for income generated by the investment (like dividends or interest), the formula becomes:
RoR = [(Ending Value – Beginning Value + Income) / Beginning Value] * 100
Components of the Calculation
- Beginning Value: This is the initial amount you invested or the value of the asset at the start of the period you are measuring.
- Ending Value: This is the value of the asset at the end of the measurement period.
- Income (Optional): This includes any profits or dividends received from the investment during the period, which are not part of the asset's price appreciation.
Why Calculate Rate of Return?
- Investment Comparison: Easily compare the performance of different assets or investment strategies.
- Performance Measurement: Track how well your investments are performing over time.
- Decision Making: Make informed decisions about where to allocate your capital.