Rate of Return Calculator
Calculate the rate of return on your investments. This calculator can find the internal rate of return (IRR) for investments with multiple cash flows or calculate the required rate of return for a target future value.
Rate of Return Results
Return Analysis
Return Benchmarks
S&P 500 Average: 10% annually
Bonds (10-year): 4-5% annually
Savings Account: 1-2% annually
Note: Past performance not indicative
Understanding Rate of Return
Rate of return (ROR) measures the gain or loss on an investment relative to the amount invested. It can be calculated in different ways depending on the investment type and time horizon.
Types of Rate of Return
- Simple Rate of Return: Total return divided by initial investment
- Compound Annual Growth Rate (CAGR): Smoothed annual return
- Internal Rate of Return (IRR): Discount rate that makes NPV zero
- Total Rate of Return: Includes dividends and capital gains
- Real Rate of Return: Adjusted for inflation
Simple Rate of Return Formula
Basic rate of return calculation:
ROR = (Final Value - Initial Value) ÷ Initial Value × 100
Expressed as a percentage
Compound Annual Growth Rate
CAGR smooths returns over multiple years:
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) - 1
Geometric average annual return
Interpreting Rates of Return
| Return Range | Performance Level | Investment Type |
|---|---|---|
| > 15% | Excellent | High-growth stocks |
| 10-15% | Very Good | Growth stocks |
| 5-10% | Good | Balanced portfolios |
| 1-5% | Fair | Conservative investments |
| < 1% | Poor | Cash equivalents |
| < 0% | Loss | Underperforming assets |
Required Rate of Return
The required rate of return is the minimum return needed to justify an investment. It considers the risk-free rate plus a risk premium.
Capital Asset Pricing Model (CAPM):
Required ROR = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Includes compensation for systematic risk
Total vs. Price Return
- Price Return: Capital appreciation only
- Dividend Yield: Income return from dividends
- Total Return: Price return + dividend yield
- Impact: Dividends can significantly boost total returns
- Reinvestment: Assumes dividends are reinvested
Risk-Adjusted Returns
Raw rates of return don't account for risk. Risk-adjusted measures provide better performance comparisons.
- Sharpe Ratio: Return per unit of total risk
- Sortino Ratio: Return per unit of downside risk
- Alpha: Excess return over benchmark
- Information Ratio: Active return per unit of tracking error
Time-Weighted vs. Money-Weighted
- Time-Weighted: Measures investment performance regardless of cash flows
- Money-Weighted: Considers timing and amount of cash flows
- Best Use: Time-weighted for comparing managers, money-weighted for personal returns
- Calculation: Time-weighted uses geometric linking, money-weighted uses IRR
Common Pitfalls
- Time Period Bias: Short-term results may not reflect long-term performance
- Market Conditions: Bull markets inflate returns, bear markets depress them
- Survivorship Bias: Only successful investments are considered
- Fees and Taxes: Not included in raw return calculations
- Inflation: Purchasing power may decline despite positive nominal returns
Applications
- Performance Measurement: Track investment results over time
- Portfolio Comparison: Compare different investment options
- Goal Tracking: Monitor progress toward financial objectives
- Manager Evaluation: Assess fund manager performance
- Tax Reporting: Calculate capital gains and losses
Tip: Rate of return is a fundamental metric for evaluating investments. Always consider the time period, risk level, and whether you're looking at price return or total return. For long-term investing, focus on total returns that include dividends and other income.