Rate of Return
What Is Rate of Return?
The rate of return (ROR) measures the percentage gain or loss on an investment over a specific period of time. It reflects how much an investment has grown or declined relative to its original value.
Rate of return is one of the most widely used measures of investment performance.
Why It Matters
Investors use rate of return to evaluate the profitability of investments and compare different investment opportunities. Understanding return helps investors assess whether their investments are meeting financial goals.
Rate of return is also used to evaluate portfolio performance.
How Rate of Return Works
The rate of return is calculated by comparing the investment’s ending value to its initial value.
Returns may come from:
- capital gains
- dividends
- interest income
The result is expressed as a percentage.
Example
An investor buys a stock for $100 and later sells it for $120 while receiving $3 in dividends. The total return reflects both the price increase and dividend income.
Rate of Return vs Total Return
- Rate of return measures the percentage change in investment value.
- Total return includes both price changes and income such as dividends or interest.
FAQs About Rate of Return
Can rate of return be negative?
Yes. If an investment loses value.
Is rate of return always annual?
No. It can be measured over different time periods.
Do investors compare rates of return across investments?
Yes. It helps evaluate performance.
Related Terms
