What is a Rate of Return?

The rate of return is the percentage increase or decrease in the value of an investment. It is usually calculated on an annualized basis, though other time periods can be used. It can be applied to measure the return on any type of investment, including securities, property, antiques, or even cryptocurrencies. It is a good way to measure the outcome of an investment strategy, as well as to compare the returns on different types of investments.

Formula for the Rate of Return

The formula for the rate of return is to subtract the price paid when an investment was acquired from the price received when it was sold - which is then divided by the acquisition price of the investment. For more accuracy, also subtract any commissions paid or other transaction fees from both the price received and the price paid. The rate of return formula is as follows:

(Price received for investment - Price paid to acquire investment) ÷ Price paid to acquire investment = Rate of return

Example of the Rate of Return

Marcus has invested $100,000 in a local business. After one year, his share of its profits was $10,000. He has experienced a 10% rate of return, which is calculated as the $10,000 of profit divided by the $100,000 investment.