How to Calculate the Simple Rate of Return

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Simple Rate of Return Calculator

.calculator-container { font-family: Arial, sans-serif; border: 1px solid #ddd; padding: 20px; border-radius: 8px; max-width: 500px; margin: 20px auto; background-color: #f9f9f9; } .calculator-inputs { display: grid; grid-template-columns: 1fr; gap: 15px; } .input-group { display: flex; flex-direction: column; } .input-group label { margin-bottom: 5px; font-weight: bold; color: #333; } .input-group input[type="number"] { padding: 10px; border: 1px solid #ccc; border-radius: 4px; font-size: 16px; } button { padding: 12px 20px; background-color: #007bff; color: white; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; transition: background-color 0.3s ease; } button:hover { background-color: #0056b3; } #result { margin-top: 20px; padding: 15px; border-top: 1px solid #eee; font-size: 18px; color: #333; background-color: #fff; border-radius: 4px; text-align: center; } function calculateSimpleRateOfReturn() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var finalValue = parseFloat(document.getElementById("finalValue").value); var timePeriodMonths = parseFloat(document.getElementById("timePeriodMonths").value); var resultDiv = document.getElementById("result"); if (isNaN(initialInvestment) || isNaN(finalValue) || isNaN(timePeriodMonths) || initialInvestment <= 0 || timePeriodMonths <= 0) { resultDiv.innerHTML = "Please enter valid positive numbers for all fields."; return; } var profit = finalValue – initialInvestment; var rateOfReturn = (profit / initialInvestment); var annualRateOfReturn = rateOfReturn / (timePeriodMonths / 12); var formattedRateOfReturn = (rateOfReturn * 100).toFixed(2); var formattedAnnualRateOfReturn = (annualRateOfReturn * 100).toFixed(2); resultDiv.innerHTML = "Simple Rate of Return: " + formattedRateOfReturn + "%" + "Annualized Simple Rate of Return: " + formattedAnnualRateOfReturn + "%"; }

Understanding the Simple Rate of Return

The Simple Rate of Return (SRR) is a fundamental metric used to evaluate the profitability of an investment over a specific period. It's a straightforward calculation that shows how much profit an investment has generated relative to its initial cost. Unlike more complex return calculations, the simple rate of return does not account for the compounding effects of returns.

How to Calculate the Simple Rate of Return

The formula for the Simple Rate of Return is:

Simple Rate of Return = (Final Value - Initial Investment) / Initial Investment

Where:

  • Initial Investment: The original amount of money put into the investment.
  • Final Value: The value of the investment at the end of the holding period.

To express this as a percentage, you multiply the result by 100.

Annualized Simple Rate of Return

Often, investments are held for periods less than a year, or you might want to compare investments with different holding periods on an annualized basis. The Annualized Simple Rate of Return adjusts the simple rate of return to reflect what it would be if it continued at the same pace for a full year. The formula is:

Annualized Simple Rate of Return = (Simple Rate of Return) / (Time Period in Years)

Or, using months:

Annualized Simple Rate of Return = (Simple Rate of Return) / (Time Period in Months / 12)

Example Calculation

Let's say you invested $10,000 in a stock. After 18 months, the value of your investment grew to $12,500.

  • Initial Investment: $10,000
  • Final Value: $12,500
  • Time Period: 18 Months

Step 1: Calculate the Profit

Profit = Final Value – Initial Investment

Profit = $12,500 – $10,000 = $2,500

Step 2: Calculate the Simple Rate of Return

Simple Rate of Return = Profit / Initial Investment

Simple Rate of Return = $2,500 / $10,000 = 0.25

As a percentage: 0.25 * 100 = 25%

Step 3: Calculate the Annualized Simple Rate of Return

Time Period in Years = 18 Months / 12 Months/Year = 1.5 Years

Annualized Simple Rate of Return = Simple Rate of Return / Time Period in Years

Annualized Simple Rate of Return = 0.25 / 1.5 = 0.1667

As a percentage: 0.1667 * 100 = 16.67%

This means your investment yielded a 25% return over 18 months, which, if sustained, would equate to an annualized return of approximately 16.67%.

Why is the Simple Rate of Return Important?

The Simple Rate of Return is useful for its simplicity and clarity. It provides a quick snapshot of an investment's performance without the complexities of compounding or risk adjustment. It's an excellent starting point for understanding basic investment returns, especially for short-term investments or when comparing a multitude of options where a quick assessment is needed.

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