{"id":5774,"date":"2021-11-18T18:20:48","date_gmt":"2021-11-18T12:50:48","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=5774"},"modified":"2022-05-24T10:26:33","modified_gmt":"2022-05-24T04:56:33","slug":"rate-of-return","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/rate-of-return\/","title":{"rendered":"Rate Of Return &#8211; Definition, Formula, Examples and How To Calculate It"},"content":{"rendered":"\n<p>Rate of return is a crucial measure of financial and economic success. To calculate the minimum acceptable <a href=\"https:\/\/www.tickertape.in\/blog\/return-on-investment\/?utm_source=blog&amp;utm_medium=article\">return on investment<\/a>, investors worldwide rely upon this metric. Individuals, companies, and other finance professionals routinely use the rate of return while purchasing new products, equipment, or even during potential mergers, and it is extensively applied to a variety of investments from stocks and <a href=\"https:\/\/www.tickertape.in\/blog\/prospects-of-the-indian-real-estate-sector-post-covid\/?utm_source=blog&amp;utm_medium=article\">real estate<\/a> to bonds and art.\u00a0\u00a0<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#What-is-the-rate-of-return\" title=\"What is the rate of return?\">What is the rate of return?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#How-to-calculate-the-rate-of-return\" title=\"How to calculate the rate of return?&nbsp;\">How to calculate the rate of return?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#Real-rate-of-return-vs-nominal-rate-of-return\" title=\"Real rate of return vs nominal rate of return&nbsp;\">Real rate of return vs nominal rate of return&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#Rate-of-return-on-stocks-and-bonds\" title=\"Rate of return on stocks and bonds\">Rate of return on stocks and bonds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#Real-rate-of-return-vs-compound-annual-growth-rate\" title=\"Real rate of return vs compound annual growth rate&nbsp;\">Real rate of return vs compound annual growth rate&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#Internal-rate-of-return-and-discounted-cash-flow\" title=\"Internal rate of return and discounted cash flow&nbsp;\">Internal rate of return and discounted cash flow&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/#In-closing\" title=\"In closing\">In closing<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-the-rate-of-return\"><\/span><strong>What is the rate of return?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Rate of return calculates the gain or loss of initial investment over a certain period. When you calculate the rate of return, you determine the change, in percentage form, from the beginning of the investment until the end.<\/p>\n\n\n\n<p>To calculate it, overall market returns, risk-free rate of return, stock <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility<\/a>, etc are considered. Rate of return doesn\u2019t take into account the impact of <a href=\"https:\/\/www.tickertape.in\/blog\/cost-inflation-index\/?utm_source=blog&amp;utm_medium=article\">inflation<\/a> in the simple calculation.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-to-calculate-the-rate-of-return\"><\/span><strong>How to calculate the rate of return?&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The formula for rate of return is as follows:<\/p>\n\n\n\n<p><strong>Rate of return = [ (Current value of investment \u2212 Initial value of investment)\u200b]\/Initial investment value \u00d7100<\/strong><\/p>\n\n\n\n<p>For instance, assume you bought a share at Rs. 100. It eventually rose to Rs. 110.<br>Now, using the formula mentioned above, the calculation would be:&nbsp;<br><strong>[(Rs. 110 \u2013 Rs. 100) \u00f7 Rs. 100] x 100 = 10<\/strong><br>Now, if you sold the share, your investment would have a 10% rate of return.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"real\"><span class=\"ez-toc-section\" id=\"Real-rate-of-return-vs-nominal-rate-of-return\"><\/span><strong>Real rate of return vs nominal rate of return&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A nominal rate of return or simple rate of return as it is commonly called does not consider the effect of inflation over time. Inflation causes a drop in the purchasing power of money. For the same reason, six years later, Rs. 100 will not have the same value as it does today.&nbsp;<\/p>\n\n\n\n<p>When the effect of inflation is factored in, it is called the real rate of return or inflation-adjusted rate of return.&nbsp;<\/p>\n\n\n\n<p><strong>Inflation &#8211; adjusted return = (1 + Return \/ 1 + inflation) &#8211; 1<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"rate\"><span class=\"ez-toc-section\" id=\"Rate-of-return-on-stocks-and-bonds\"><\/span><strong>Rate of return on stocks and bonds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The formula for calculating the rate of return for stocks and bonds is slightly different.<\/p>\n\n\n\n<p>Let\u2019s suppose you buy a stock for Rs. 60 a share and own it for one year, during which you earn a total amount of Rs. 10 in <a href=\"https:\/\/www.tickertape.in\/blog\/dividend-yield\/?utm_source=blog&amp;utm_medium=article\">dividend<\/a>.<\/p>\n\n\n\n<p>Assume you sold the stock for Rs. 80, then:<br><strong>Total stock return = (End period stock price &#8211; Initial stock price) + <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">Dividend<\/a> \/ Initial stock price<\/strong>&nbsp;<\/p>\n\n\n\n<p>Calculated as per formula: Rs. (80 &#8211; 60) + Rs. (10\/60) = Rs. 30<br>Hence for this example, the return would be Rs. 30&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"return\"><span class=\"ez-toc-section\" id=\"Real-rate-of-return-vs-compound-annual-growth-rate\"><\/span><strong>Real rate of return vs compound annual growth rate&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The simple rate of return and <a href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/?utm_source=blog&amp;utm_medium=article\">compound annual growth rate<\/a> (<a href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/\">CAGR<\/a>) are closely related. The CAGR is the average yearly rate of return on an investment spanning longer than one year. While calculating CAGR for different years, growth over multiple periods has to be taken into account.<\/p>\n\n\n\n<p>The formula for CAGR is as follows:&nbsp;<\/p>\n\n\n\n<p><strong>CAGR = [(Ending Value\/Beginning Value) ^ (1\/N)] &#8211; 1&nbsp;<\/strong><\/p>\n\n\n\n<p>where <em>N = Time period<\/em><\/p>\n\n\n\n<p>For example, assume the initial value of your investment at the beginning of the period in question is Rs. 15,000, and the final value at the end of three years is Rs. 25,000. Then, CAGR is calculated as:<\/p>\n\n\n\n<p>CAGR = (25,000\/15,000) ^ (\u2153) \u2013 1<br>CAGR = 7.16%.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"internal\"><span class=\"ez-toc-section\" id=\"Internal-rate-of-return-and-discounted-cash-flow\"><\/span><strong>Internal rate of return and discounted cash flow&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>One must be aware that the rate of return, over time, does not consider time value of money. Hence, a better alternative for businesses and investors is the discounted cash flow (DCF) method.&nbsp;<\/p>\n\n\n\n<p>Discounted cash flows are comprehensive in a way that it considers the earnings on investment and discounts each of the cash flow generated against a discount rate.&nbsp;<\/p>\n\n\n\n<p>The discount rate in simple words is the minimum rate of return acceptable to an investor.&nbsp;DCF method can be used to estimate the value of a <a href=\"https:\/\/www.tickertape.in\/blog\/5-stock-picks-based-on-scientific-investing-style\/?utm_source=blog&amp;utm_medium=article\">stock<\/a>, bond, business, company, and even equipment.&nbsp;<\/p>\n\n\n\n<p>When you use the rate of return with a discounted cash flow, it is known as the internal rate of return (IRR). The IRR is a discount rate that makes the net present value (NPV) of all cash flows belonging to a particular investment or project equal zero. IRR calculations use the same formula as NPV does and apply money\u2019s time value with interest.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"In-closing\"><\/span><strong>In closing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Investment returns can be calculated using various formulas, rate of return being the most popular. Rate of return is used to calculate the returns on the initial investment. It helps to calculate gains or losses incurred by the investments over a period of time. One can use it also for comparison, along with other types of rate of return calculation such as CAGR, DCF, etc., to have a holistic view of their returns.<\/p>\n\n\n\n<p class=\"has-text-align-center\"><em>Hey before you go, we\u2019ve got something special for you! On the occasion of Diwali 2021, we are gifting you a free <a href=\"https:\/\/www.tickertape.in\/blog\/tickertape-pro-features-for-advanced-investment-analysis\/\">Tickertape Pro<\/a> upgrade. It\u2019s&nbsp;<a href=\"https:\/\/chat.smallcase.com\/smallcase\/messages\/b0e36a07944a778692ce9ab62e195c2b3705c30c#\" rel=\"nofollow noopener\" target=\"_blank\">#DimaagLaganeKaMuhurat<\/a>! All you have to do is just sign up on&nbsp;<a href=\"https:\/\/www.tickertape.in\/?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Tickertape<\/a>&nbsp;and avail the offer. Go on, claim your free account now!<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Wondering how you can calculate rate of return (ROR) on your investments? Click here to know what is rate of return, its significance &#038; get latest examples for calculating ROR!<\/p>\n","protected":false},"author":54,"featured_media":5217,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[8,1769],"tags":[],"acf":[],"modified_by":"Anjali Chourasiya","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/10\/new1-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5774"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/54"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=5774"}],"version-history":[{"count":3,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5774\/revisions"}],"predecessor-version":[{"id":8503,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5774\/revisions\/8503"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/5217"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=5774"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=5774"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=5774"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}