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Rate of return definition
Rate of return is the percentage gain or loss on an investment over a set period, measured against what was originally paid. It expresses performance as a percentage rather than a cash amount.
Rate of return takes the final value, subtracts the initial value, and divides the result by the initial value. It applies to shares, bonds, funds, property, and business projects. A positive figure means the investment gained value; a negative figure means it lost value.
A plain rate of return covers one stated period, however long that period runs. An annualised rate of return restates the figure on a yearly basis, so a three-month result and a five-year result can be compared on the same footing. Rate of return also differs from the absolute return, which is the raw cash gain rather than a percentage.
Rate of return Example
You buy shares for USD 5,000. They later rise in value to USD 5,750. You work out the rate of return:
rate of return = (final value - initial value) √∑ initial value √ó 100
(USD 5,750 - USD 5,000) √∑ USD 5,000 √ó 100 = 15%
You hold a 15% rate of return, before tax, fees, or other costs.
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