Yearly Rate of Return Method
Candlefocus EditorThe Yearly Rate of Return Method can determine the performance of any asset, including stocks and bonds, as long as one-year values are available. To calculate the Yearly Rate of Return, the asset’s beginning value must be known. This value is typically taken from the last trading day of the calendar year before the start of the one-year period. The end value is the asset’s value on the last trading day of the one-year period.
Once both start and end values are known, the Yearly Rate of Return calculation is simple: to get the rate of return (%) for the asset for that period, subtract the ending value from the beginning value, divide it by the beginning, and finally multiply by 100.
The Yearly Rate of Return Method is useful for comparing the performance of different assets in a direct and quick way. In addition, the Yearly Rate of Return Method answers the simplest, yet most important, question that an investor will have – “Has my money been invested well in this asset?”
However, while the Yearly Rate of Return calculation is simple and direct, it is not without its limitations. It is important to remember that the Yearly Rate of Return only calculates one year’s performance. It does not take into account compounding over the long-term, and thus should not be used to judge the potential to earn through compounding returns over a longer period.
In summary, the Yearly Rate of Return Method is a useful tool to quickly measure the performance of an asset over one-year. However, it is important to remember that it only measures performance over a single year, and does not take into account compounding. Therefore longer-term investment choices should be judged using a different performance measure.