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Charlie Munger

Investment Dictionary


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Rate of Return

 

A rate of return is a percentage that shows what is the profit or loss gained on some investment on annual basis. There are many ways to calculate the rate of return including internal rate of return, arithmetical average return, geometrical average return or other. However, geometric mean is the most accurate and is calculated as CAGR using CAGR formula.

 

The higher rate of return is the more successful investment. While every investment is made on purpose to earn some return over time, it is very important to calculate it correctly. To measure real success of investment is not enough to calculate arithmetical or geometrical average of gains (gain on capital increase, dividends, interest and other payments) because every investment has different risk level and the return on investment portfolio should be adjusted to the risk of it. A good investment performance measurement requires attention to many details.

 

One most know that there are many types of returns and a lot of them are based on some kind of asset, as return on assets, return on equity, return on invested capital or other. 

 






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