RoR
A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.
When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.
Definition:
RoR stands for Rate of Return. It represents the net gain or loss of an investment over a specific period, expressed as a percentage of the initial investment cost. It is a crucial metric for assessing the performance of an investment, helping investors evaluate the profitability of their investments.
Origin:
The concept of Rate of Return dates back to the early financial markets when investors needed a method to measure the returns on their investments. As financial markets evolved, RoR became a standard tool for evaluating investment performance.
Categories and Characteristics:
1. Annualized Rate of Return: This standardizes the return rate to an annual basis, making it easier to compare investments with different time horizons.
2. Real Rate of Return: This is the return rate after adjusting for inflation, providing a more accurate reflection of the investment's actual profitability.
3. Nominal Rate of Return: This is the return rate without adjusting for inflation, typically used for short-term investments.
Examples:
1. Stock Investment: Suppose you bought a stock for $100 at the beginning of 2023, and by the end of 2023, the stock price increased to $120, and you received a $5 dividend. The RoR = [(120 + 5 - 100) / 100] * 100% = 25%.
2. Real Estate Investment: Suppose you bought a property for $500,000 in 2020 and sold it for $700,000 in 2024, while also earning $20,000 in annual rental income. The RoR = [(700 + (20*4) - 500) / 500] * 100% = 48%.
Common Questions:
1. How to calculate the Rate of Return? The formula for RoR is: RoR = [(Ending Value - Initial Investment + Income) / Initial Investment] * 100%.
2. Does RoR consider risk? RoR itself does not consider risk. Investors need to use other metrics (such as the Sharpe Ratio) to evaluate risk-adjusted returns.
