Overview of Return on Investment
The return on investment is popularly known as the rate of return. It is also known as return. It is an extremely important concept in the context of modern day finance and investments. The concept of return on investment is also important for the investors. The return on investment is also known as the rate of profit.
Description of Return on Investment
Return on investment can be explained as a calculation of the amount of profitability that is provided by a particular investment. It does not account for the size of the investment. It is primarily a percentage return, which is calculated on the basis of the money that has been invested.
The return on investment can also be calculated in monetary terms. It can also be described as a yearly rate of return. It is mostly expressed as a percentage rather than a decimal.
It can be applied to any investment irrespective of when it was made. It is also different from dividend reinvestment and compound interest rate in that it does contribute to the growth in the size of the investment. It is normally assumed that the return on investment is directly proportional to the amount of risk involved in a particular project.
Use of Return on Investment
The most basic use of the return on investment is that it can provide the investor with an idea of the cash flow he can expect from a particular investment. The predictions of cash flows are normally for a certain period of time, which is only about a year.
Arithmetic Return on Investment
Following is a numeric presentation of the arithmetic return on investment in terms of mathematics:
ROIArith = Vf – Vi/Vi
In this formula:
Vf represents the value of the final investment
Vi represents the value of the initial investment
Logarithmic or Continuously Compounded Return on Investment
Following is the equational representation of the logarithmic or continuously compounded return on investment:
ROILog = In (Vf/Vi)
Mean Annual Return of Mutual Funds
The mean annual return of mutual funds can be calculated by using the following formula:
Average Annual Return= [(1+ Cumulative Return/100)1/ Time in years – 1] � 100
For more information please refer to the following links:
Return on Assets
Return on Capital
Return on Equity
Last Updated on : 27th June 2013