Understanding Geometric Rate of Return
The geometric rate of return accounts for the effects of compounding, providing a more accurate picture of investment growth over time than simple average returns. This is particularly important for understanding long-term investment performance, where the power of compounding becomes significant.
The formula used is:
Geometric Rate of Return = ( (Final Value / Initial Value) ^ (1 / Number of Years) ) – 1
Where:
- Initial Investment Value: The starting value of your investment.
- Final Investment Value: The ending value of your investment after the specified number of years.
- Number of Years: The total duration of the investment period.
A positive geometric rate of return indicates that the investment has grown in value over the period, while a negative rate indicates a loss in value.
function calculateGeometricRateOfReturn() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var finalInvestment = parseFloat(document.getElementById("finalInvestment").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous results
if (isNaN(initialInvestment) || isNaN(finalInvestment) || isNaN(numberOfYears) || initialInvestment <= 0 || numberOfYears <= 0) {
resultElement.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
if (finalInvestment < 0) {
resultElement.innerHTML = "Final investment value cannot be negative.";
return;
}
var geometricRate = Math.pow((finalInvestment / initialInvestment), (1 / numberOfYears)) – 1;
// Format the result as a percentage
var formattedRate = (geometricRate * 100).toFixed(2);
resultElement.innerHTML = "The Geometric Rate of Return is:
" + formattedRate + "%";
}
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