How to calculate return on investment with example?
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There are a number of ways to calculate the investment return of an account. We discussed some of these (real return, total return and risk-adjusted return) in the Quantitative Methods section, and bond yields (yield-to-maturity, yield-to-call and the real interest rate) were discussed in the Fixed Income Secutities section. You will not be tested on the actual formulas, so we have not included them here (other than those provided for clarity). In this section we'll focus on return measures:
Return Measures
Return on investment (ROI) - this is the classic measure of performance, taking into account all cash flows (including dividends, interest, return of principal and capital gains). To calculate, simply divide the sum of all cash flows by the number of years the investment is held and then divide that amount by the original amount invested.
Risk premium - the risk premium is the higher return that is expected for taking on the greater risk associated with investing in a growth stock, versus a stock from a more established company.
Risk-free rate of return - the current rate for Treasury bills is typically used in calculations, such as risk-adjusted return and the Sharpe ratio.
Expected return - since the expected return is the average of the probability of possible rates of return, it is by no means a guaranteed rate of return. However, it can be used to forecast the future value of a portfolio and also provides a guide from which to measure actual returns.
Read more: Measuring Portfolio Returns https://www.investopedia.com/exam-guide/series-65/portfolio-risks-returns/measuring-portfolio-returns.asp#ixzz5AfkK0NBV
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Return Measures
Return on investment (ROI) - this is the classic measure of performance, taking into account all cash flows (including dividends, interest, return of principal and capital gains). To calculate, simply divide the sum of all cash flows by the number of years the investment is held and then divide that amount by the original amount invested.
Risk premium - the risk premium is the higher return that is expected for taking on the greater risk associated with investing in a growth stock, versus a stock from a more established company.
Risk-free rate of return - the current rate for Treasury bills is typically used in calculations, such as risk-adjusted return and the Sharpe ratio.
Expected return - since the expected return is the average of the probability of possible rates of return, it is by no means a guaranteed rate of return. However, it can be used to forecast the future value of a portfolio and also provides a guide from which to measure actual returns.
Read more: Measuring Portfolio Returns https://www.investopedia.com/exam-guide/series-65/portfolio-risks-returns/measuring-portfolio-returns.asp#ixzz5AfkK0NBV
Follow us: Investopedia on Facebook
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