Rate of return is the earnings an asset generates in excess of its initial cost. The amount is usually expressed as an annualized percentage rate.  Rate of return can be calculated based on the cash flows generated by the asset.  In addition, it can include a capital gain element.  Finally, the rate of return can be negative when the asset produces less income than its cost.The formula for calculating the rate of return over a single period is: Rate of Return = (Final Asset Value – Initial Asset Value) / Initial Asset Value Rate of return is used to compare similar assets to determine which asset is the better investment.  A rate of return can be measured for any type of asset, including marketable securities, real estate and collectibles such as fine art and jewelry.  For instance, Kendall buys a duplex for $100,000.  She lives in one side and rents the other side for $400 a month.  At the end of 12 months, she sells the duplex for $120,000. The initial value is $100,000. The final value is equal to the $120,000 sales price plus $400 monthly rent Kendall received for 12 months ($400 x 12 = $4,800).  Therefore the total final value is $124,800.  Kendall’s rate of return on her duplex investment is 24.8% ($124,800-$100,000) / $100,000 = 24.8%