Rate of Return
It is nothing but the rate at which a loss or gain is yielded from an investment. It is also termed as Return on investment and rate of profit. There are basically two types of rate of return calculation they are arithmetic rate of return calculation and logarithmic rate of return calculation. Even though the calculated value for small investment by these two methods remains unchanged however the calculated value for large investment by arithmetic is never equivalent to the one calculated by logarithmic method. The arithmetic and logarithmic return for negative investment are also not same. The second classifications of rate of return are annualized rate of return and annual rate of return. The basic difference between annualized rate of return and annual rate of return is that annual rate of return is for a single period whereas annualized rate of return is for multiple period.
Rate of return are usually used by the investor to make financial decision. The investor will have some investment return on his mind he will compare that with the rate of return and decide upon whether to invest in the asset or not. The rate of return is mainly used by the large investors. Rate of return is not usually useful for traders. Return of investment is also used to analyze the company performance at a various time period. If the rate of return keeps on increasing then the asset is said to be in growth mode. If the rate of return keeps on decreasing then the asset is said to be in the decline mode. If the rate of return is fixed for various period of time then the company is said to have no growth at all.
Rate of return has a disadvantage of not including the time period while calculating it. Time period plays a crucial role in investment decision. In recent years the economist has included time period into the Rate of return calculation. It gives more advantage than the normal rate of return method.