An Introduction to Rate of Return

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The rate of return (ROR), or return on investment (ROI), entails a financial ratio that measures the amount of money gained with respect to the amount initially invested.

Generally, this ratio is expressed as a percentage rather than decimal, and the money invested is referred to as assets, capital, principal sum or acquisition value of the investment.

Rate of return is also called rate of profit or in some cases just return, it shows the financial success of the whole, be it within a company committed to assess capital or other investment.

Since rates of return are percentages, it is not possible to calculate the average rate of negative and positive rates to find the monetary returns. Although, in everyday life it is common to estimate monetary returns by averaging between the periodic rate of return.

These estimates may be quite relevant when the means are periodic returns or all positive or negative, or when they vary little.

The initial value of an investment does not always clearly define monetary value, but measures ROI, the initial value must be clearly established – and the justification of that value.

Arithmetic and logarithmic returns are generally not parallel, instead they can be more or less equal in relation to small returns. The distinctions are much clearer whenever percentage alterations are greater.

Logarithmic returns for their part are frequently applied by academics in research projects. On the other hand, arithmetic and geometric average rates of return pertain to averages of periodic percentage returns.

In essence, the calculation of percentage returns on investments is based on a specified period of time, the initial and end of tenure investment, rather than on original investment funds.

In financial terms, the word yield points to a rate of return based on a combination of investment, reinvestment and/or fluctuating market value factors. The performance indicates that the value of an investment is increasing or decreasing during the investment period.

The annual percentage rate (APR) indicates an annual rate of return generated by compound interest. And to determine the capital value of an investment at a particular time, it is first of all necessary to predict the returns of the investment.

The investment costs are the total fixed capital investment, and should therefore be taken into account. These can be in the form of machinery purchases, training costs or transportation costs, etc.

Any investment with a return below the inflation rate represents an annual loss of value, even if the performance exceeds 0%. When the ROI is adjusted for inflation, the yield obtained is considered a decrease or increase in purchasing power.

 

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