Understanding and Calculating Total Rate of Return
The Total Rate of Return (TROR) is a fundamental metric used to measure the performance of an investment over a specific period. It accounts for all income generated by an investment, including dividends, interest, and capital appreciation (or depreciation). Understanding TROR is crucial for investors to compare different investment opportunities, evaluate their portfolio's performance, and make informed decisions.
Key Components of Total Rate of Return:
- Initial Investment Value: The initial amount of money you invested.
- Final Investment Value: The value of your investment at the end of the measurement period.
- Income Received: Any cash flows generated by the investment during the period, such as dividends, interest payments, or rental income.
The Formula:
The total rate of return is calculated using the following formula:
TROR = ((Final Investment Value - Initial Investment Value) + Income Received) / Initial Investment Value
The result is typically expressed as a percentage.
Why is TROR Important?
TROR provides a comprehensive view of an investment's profitability by considering both price changes and income generation. This makes it a more accurate measure than simply looking at capital gains alone. By comparing the TROR of different assets, investors can identify which investments have been the most successful in generating value.