About Rate of Return (ROR)

What is Rate of Return?

Rate of Return (ROR) is a financial metric used to measure the profitability of an investment over a specific period of time. It represents the percentage change in the value of an investment between the beginning and end of the investment period, typically expressed on an annual basis.

Formula for Rate of Return

The formula to calculate Rate of Return is:

\[\\text{ROR} = \\left(\\frac{\\text{FV}}{\\text{PV}}\\right)^{\\frac{1}{n}} - 1\]

Where:

• ROR = Rate of Return
• FV = Future Value
• PV = Present Value
• n = Number of years

Calculation Steps

1. Determine the Future Value (FV) and Present Value (PV) of the investment.
2. Determine the time period (n) in years.
3. Divide FV by PV.
4. Take the nth root of the result (where n is the number of years).
5. Subtract 1 from the result.
6. Convert to a percentage by multiplying by 100.

Example

Let's calculate the Rate of Return for an investment with the following data:

• Present Value (PV): $10,000
• Future Value (FV): $13,000
• Time period: 5 years

1. ROR = (13000 / 10000)^(1/5) - 1
2. ROR ≈ 0.0539 or 5.39%

Visual representation:

Therefore, the Rate of Return for this investment is approximately 5.39% per year over the 5-year period.