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Rate of Return Formula:
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The Rate of Return formula calculates the percentage gain or loss on an investment over a specified time period. It's a fundamental measure in finance to evaluate investment performance and compare different investment opportunities.
The calculator uses the Rate of Return formula:
Where:
Explanation: The formula calculates the compound annual growth rate (CAGR) that would be required for an investment to grow from its present value to its future value over the specified time period.
Details: Calculating rate of return is essential for investment analysis, portfolio management, financial planning, and comparing the performance of different investments. It helps investors make informed decisions about where to allocate their capital.
Tips: Enter the future value and present value in dollars, and the time period in years. All values must be positive numbers. The calculator will output the annualized rate of return as a percentage.
Q1: What's the difference between simple return and compound return?
A: Simple return calculates total return without considering compounding, while compound return (like this formula) accounts for the effect of earnings being reinvested.
Q2: Can this formula be used for negative returns?
A: Yes, the formula works for both positive and negative returns. A negative result indicates a loss on the investment.
Q3: How does this differ from average annual return?
A: This calculates compound annual growth rate (CAGR), which provides a smoothed annual rate that would yield the same end result, unlike simple averaging which can be misleading.
Q4: What are typical rate of return expectations?
A: This varies by asset class. Stocks historically average 7-10% annually, bonds 3-5%, while savings accounts typically yield 1-3%.
Q5: Are there limitations to this formula?
A: This formula assumes a constant rate of return over the entire period and doesn't account for additional contributions, withdrawals, or taxes.