How is the rate of return on an investment calculated?

The rate of return on an investment measures how much an investment has gained or lost in value over a specific period, expressed as a percentage of the original investment. The calculation involves dividing the total income generated from the investment during that period by the original amount invested. This approach provides a clear perspective on the investment's performance relative to its cost.

When total income is calculated, it typically includes any interest, dividends, or capital gains earned during the period. Dividing this total by the original investment allows investors to see how effectively their money is working. If the result is a higher percentage, it indicates a better performance of the investment.

Thus, this method of calculating the rate of return is central to evaluating the effectiveness of investments, allowing investors to compare the returns of different investments or assess the performance of their own investment choices over time.