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Return on Investment


Return on investment (ROI) is a percentage that shows profitability of an investment or investment portfolio. Return on investment calculation:




Return on investment = net income from investment / initial value of investment


* Net income should include all revenue from investment and exclude all expenses related.


If you want to get annual return (which is the most comparable ratio) you should use annual net income from investment, which should include capital gains and payments received (dividends, interests, capital decrease payoffs etc.). Return on investment is very simple ratio and is not very proper for exact calculation of more complicated investment projects. For such cases would be more advisable to use internal rate of return (IRR) ratio.


However, return on investment may be calculated differently for investment portfolio or some corporate investment. Some financial analyst use return on investment (ROI) to asses company’s profitability for the fiscal period. But ROI isn’t exactly that, while better ratios for company’s profitability measurement may be ROA or ROE, or profit margin. It doesn’t mean that return on investment cannot be applied for company, but such perform would require a lot more creative application to decide what is investment and return in that case.


The best ratio to measure return of investment portfolio is CAGR, while CAGR formula is based on geometric mean and takes interest of interest into consideration. 



What is normal return? 


Return depends mostly on investment type or asset class:


Return on bond investment can be from 1% to 15% or more as an asset class. Of course return on some single bond can be unlimited depending on risk and market conditions. But normally safe bonds offer from 2%-5% depending on base rates and junk bonds may return a yield of 7%-15% as an asset class depending on previously mentioned conditions and attitude to risk of the markets. 


Return on stock investment as a yield is more theoretical because it depends on many factors of the future. But depending on market conditions return from stocks over very long period may be 8%-11% in developed markets and approximately 10-13% in emerging markets. If markets are very high during the acquisition of the stocks then lower return can be expected in the future and otherwise.



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