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Return

Return is the amount of profit, expressed in dollars or percentages, earned on an investment.

Contents

Expanded Definition

There are two common uses of return:

  • Simple
  • Compounded

Simple return

Simple return is just the amount of money made on the investment compared to the original. It is calculated as follows:

<math>(\frac{EV}{BV} - 1)*100%</math>

where
EV = ending value, the value of the investment today (or at some point in the future),
BV = beginning value, the value of the investment when purchased.


For instance, if a stock was purchased at $14.43 on Jan. 2, 2003 and its value today is $32.79, then the simple return would be

<math>(\frac{$32.73}{$14.43}-1)*100%=(2.2682-1)*100%=126.82%</math>

Compounded return

Compounded return is the average return per year. This can be thought of an interest rate, compounded annually, paid upon the investment. This uses the concept of compound interest. It is calculated as follows:

<math>((\frac{EV}{BV})^{(1/YR)} - 1)*100%</math>

where
EV = ending value, the value of the investment today (or at some point in the future),
BV = beginning value, the value of the investment when purchased,
YR = number of years since the purchase.


For instance, using the same example above, but saying we sell on Jul. 2, 2008 (5 years, 6 months or 5.5 years), the compounded average annual return (also called compound annual growth rate, CAGR) is:

<math>((\frac{$32.73}{$14.43})^{(1/5.5)} - 1)*100%=((2.2682)^{0.1818}-1)*100%=(1.1606-1)*100%=16.06%</math>

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