Yearly Rate Of Return Method

What Does Yearly Rate Of Return Method Mean?

The yearly rate of return method is an annual calculation of gains and losses from investment, as a proportion of the original investment. The rate calculated is frequently referred to as an "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 multiplied by 12 if the rate of return is calculated on a monthly basis).

For example, suppose that you have 100 shares, each worth $5. Your initial investment will be $500 (100 x 5). If cash dividends from your shares yield an additional dollar per share, for a total of $100 in additional value (100 x 1), your total rises to $600. The change in value will be calculated by subtracting the final amount ($600) from the initial investment ($500), resulting, in this case, in $100. The yearly rate of return is then calculated by dividing this change in value ($100) by the initial investment ($500), resulting in a rate of 2 percent.