Rate of Return Calculator

How to Calculate Rate of Return

The rate of return is a key metric used to evaluate the performance of an investment over time. It measures the percentage change in the value of an investment over a specific period, taking into account factors such as the initial investment amount, final value, and investment duration.

Rate of Return Formula

The formula for calculating the rate of return is:

$$\text{Rate of Return} = \left(\left(\frac{\text{Final Value}}{\text{Initial Investment}}\right)^{\frac{1}{\text{Investment Period} \times \text{Compounding Frequency}}} - 1\right) \times \text{Compounding Frequency} \times 100\%$$

Where:

• Final Value: The value of the investment at the end of the investment period
• Initial Investment: The amount initially invested
• Investment Period: The duration of the investment in years
• Compounding Frequency: The number of times interest is compounded per year

Calculation Steps

1. Determine the initial investment amount.
2. Determine the final value of the investment.
3. Calculate the investment period in years.
4. Identify the compounding frequency.
5. Apply the rate of return formula.
6. Convert the result to a percentage.

Example Calculation

Let's calculate the rate of return for an investment with the following data:

• Initial Investment: $10,000
• Final Value: $15,000
• Investment Period: 5 years
• Compounding Frequency: Annually (1 time per year)

Step 1: Apply the formula

$$\text{Rate of Return} = \left(\left(\frac{15000}{10000}\right)^{\frac{1}{5 \times 1}} - 1\right) \times 1 \times 100\%$$

Step 2: Calculate the result

$$\text{Rate of Return} = 8.45\%$$

Therefore, the rate of return for this investment is 8.45% per year.

Visual Representation

This diagram illustrates the change in investment value over time. The blue bar represents the initial investment, and the green bar represents the final value. The difference in height between the two bars visually represents the return on investment.