The rate of return is the earnings from an investment, stated as a percentage of the invested amount. The rate of return is typically calculated and presented on an annualized basis. Examples of how the rate of return can be calculated are:
- Stocks. The change in market price of the shares plus any dividends received, divided by the price at which the shares were purchased.
- Bonds. The change in market price of the bonds plus interest payments received, plus or minus any discount or premium amortization, divided by the amount at which the bonds were purchased.
If an investor does not sell an investment asset at the end of the measurement period, then any portion of the investment return related to an increase in the value of the asset is said to be unrealized. It is only realized if the asset is sold.
The rate of return can be negative if there is a decline in the value of the investment instrument during the measurement period.
An investor contemplating a possible investment may only commit funds if the opportunity is projected to exceed the investor's minimum acceptable rate of return. This threshold level may be the investor's own cost of capital.