Business, Legal & Accounting Glossary
The yield or reward from an investment.
Return is the amount of profit, expressed in dollars or percentages, earned on an investment.
There are two common uses of return:
Simple return is just the amount of money made on the investment compared to the original. It is calculated as follows:
= (\frac{EV}{BV} - 1)*100%
where
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
= (\frac{$32.73}{$14.43}-1)*100%=(2.2682-1)*100%=126.82%
Compounded return is the average return per year. This can be thought of as an interest rate, compounded annually, paid upon the investment. This uses the concept of compound interest. It is calculated as follows:
= ((\frac{EV}{BV})^{(1/YR)} - 1)*100%
where
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:
= ((\frac{$32.73}{$14.43})^{(1/5.5)} - 1)*100%=((2.2682)^{0.1818}-1)*100%=(1.1606-1)*100%=16.06%
The rate of return is most often published for mutual funds but can be calculated for any stock.
Usually, you sum the market value on the final date plus all the dividends and distributions you received during the period and divide that by the market value on the first day (subtract 1 and multiply by 100 to get % gain).
You can get similar numbers off of published charts for the stock, but then dividends and other distributions are not usually included.
Note further that stock prices vary throughout the period. The precise number you get depends on exactly which points you choose to use in the calculation. If the stock did a big jump in value or decline stair-step fashion, the number can be deceiving. (So be careful what you use the data for.) Usually, the number is done for the year. You can calculate it for the quarter (or some other period) too but then multiply it by four to get an annual value for comparison to annual values.
For a stock that makes rather smooth changes, you can average out the variations by doing a curve fitting routine (usually least squares) available in most spreadsheet programs. Then the return is the calculated slope of the calculated straight line drawn through the data. On a linear stock chart, you can also draw a straight line by hand and calculate the slope to get a value.
Like most investment tools return is a guide, not a hard and fast rule. It is most useful to collect items into groups, but minor differences are probably not so important.
Return is your paper profit. Most of it is realized only when you sell. Then it becomes taxable too. Use it to judge performance. Other factors are often a better indicator of when to sell. But it can help you identify underachievers and get you looking for something better.
Rate of return
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This glossary post was last updated: 29th November, 2021 | 0 Views.