What Is The Yearly Rate Of Return Method?

The yearly rate of return method, commonly referred to as annual percentage rate, is the interest rate earned on a fund throughout an entire year. The yearly rate of return is calculated by taking the amount of money gained or lost at the end of the year and dividing it by the initial investment at the beginning of the year. This method is also referred to as the annual rate of return or the nominal annual rate.

BREAKING DOWN Yearly Rate Of Return Method

The calculation for the yearly rate of return method is straightforward: [End of year value – Beginning of the year value] divided by beginning of the year value.

Example of Yearly Rate of Return Method Calculation

As an example. If a stock begins the year at $25.00 a share and ends the year with a market price of $45.00 a share - this stock would have an annual, or yearly, rate of return of 80.00% [45-25]/25 x 100% (to bring back to a percentage) = 80.00%. It should be noted that this would technically be called capital appreciation, which is only one source of an equity security’s return. The other component would be dividend yield, if any.

As a measure of return, the yearly rate of return is rather limiting: delivering only a percentage increase over a single, one year period. By not taking into consideration the effects of compounding, it’s limited by not including a growth component. But as a single period rate, it does serve its purpose.

Other Return Measures

Other common return measures, which may be an extension of the basic return method, include adjusting for discrete or continuous time periods. Helpful for more accurate compounding calculations in certain financial market applications.

Asset managers commonly use money-weighted and time-weighted rates of return to measure performance or the rate of return on an investment portfolio.

In an effort to be more transparent with investors, particularly retail, measuring and disseminating investment performance has become its niche within capital markets. The CFA Institute, a worldwide leader in the advancement of financial analysis, now offers a professional Certificate in Investment Performance Measurement (CIPM) designation. According to the CIPM Association, the CIPM program was developed by the CFA Institute as a specialty credentialing program that develops and recognizes the performance evaluation and presentation expertise of investment professionals who "pursue excellence with a passion."