What is rate of return?

The rate of return is a key financial metric used to evaluate the profitability of an investment. It is defined as the percentage of the amount invested that the investor receives back, meaning it accounts for the total dividends, interest, or appreciation in value that is earned on an investment relative to its initial cost. This measure offers a clear picture of how effectively the asset has performed over a specific period and allows investors to compare different investment opportunities.

For example, if an investor puts $1,000 into a stock and receives $1,200 after a year, the rate of return would be calculated as ($1,200 - $1,000) / $1,000 = 20%. This indicates that the investment has generated a return of 20% on the initial investment.

Understanding this concept is vital for making informed investment decisions, as it provides insight into the efficiency and effectiveness of different investment strategies. Comparatively, other options do not accurately define the rate of return. For instance, discussing the price of an investment divided by shares does not reflect returns, nor does the total income generated from a property solely represent returns without considering initial investment costs. Similarly, the initial investment cost only indicates what was spent and does not address the returns achieved on that investment