Yearly Rate Of Return Method

What Does Yearly Rate Of Return Method Mean?

The Yearly Rate of Return Method is an annual calculation of the gains and losses from an investment, expressed as a proportion of the original investment. The resulting rate is often referred to as the “annual percentage rate” or “nominal value.”

Insuranceopedia Explains Yearly Rate Of Return Method

This method calculates the rate of return by dividing the amount of money gained or lost at the end of the year by the initial investment, and multiplying by 12 if the rate of return is calculated on a monthly basis.

For example, suppose you have 100 shares, each worth $5. Your initial investment would be $500 (100 x 5). If cash dividends from your shares yield an additional dollar per share, for a total of $100 in added value (100 x 1), your total value rises to $600. The change in value is calculated by subtracting the final amount ($600) from the initial investment ($500), resulting in a $100 increase. The yearly rate of return is then calculated by dividing this change in value ($100) by the initial investment ($500), giving a rate of 20 percent.