Rate of Return

What is the rate of return mean?

Rate of Return means the percentage of gain or loss on an investment compared to the principal amount in the beginning of the investment. It can be related to a specific period of time like the annual rate of return which is based on one year period

How do you calculate a rate of return?

Rate of Return is calculated as the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. It is calculated by dividing the difference between the last amount reached and the principal amount by the principal amount and multiplied into 100.

What is a normal rate of return?

The normal rate of return is defined as the percentage of loses or gains from an investment. It is calculated after subtracting the capital, investment and operating costs based on the final net profit amount.

What is the formula of average rate of return?

Average rate of return is equal to the sum of average rate of return over specified years divided by the number of years for which the investment lasted. The average rate of return can be derived by dividing the annual profit by the number of years. After that, divide the average profit by initial cost of investment. Note that time value of money is very critical while evaluating a capital project. The average rate of return is used to estimate the profitability of projects. However, it does not take into consideration the time value of money.

What is a bad rate of return?

Rate of return depends mainly on the nature of the investment and the level of risk as well as the initial expectations at the start of investment however there is no doubt that negative rate of return is bad since it means loss from the principal value instead of growth . It can be recovered by achieving positive Rate of return in the next periods in order to improve the overall average rate of return

Is a high rate of return good?

Definitely yes, rate of return reflects the amount of gain or loss on an investment and the higher the rate of return the more gain it means. Investors who are taking the highest risk investments are targeting as high rate of return as possible as those type of investments might discontinue.