The rate of return (RoR) is an essential financial metric used to measure the effectiveness of an investment. It represents the percentage change from the initial investment amount to the value realized at the end of an investment period, accounting for any income (such as interest or dividends) and capital gains or losses. For instance, if you invest $1,000 and receive $1,100 after one year, your rate of return is 10%.
A positive rate of return indicates profitability, while a negative value suggests a loss. RoR is used in various financial contexts, including evaluating the performance of individual investments or comparing multiple investment opportunities. For example, when considering two options, one yielding 8% and another 5%, the rate of return provides a clear measure of which investment generated more wealth.
Furthermore, there are different forms of rate of return calculations, including annualized or compound rate of return, often used for long-term investments, to provide a standard for comparison.