Rate of return
The investor's return on an investment, expressed as a proportion of the amount invested.
Most commonly expressed as a percentage.
All other things being equal, the greater the expected rate of return, the more attractive the investment proposal.
The other thing that must always be equal, in order to make a direct comparison between rates of return, is risk.
Example
GBP 1 million is invested.
GBP 1.03 million is repayable at the end of the period.
The rate of return per period (r) is:
r = (End amount / Start amount) - 1
Which can also be expressed as:
r = (End / Start) - 1
= (1.03 / 1.00) - 1
= 0.0300
= 3.00% per period
Basis of quoting rates of return
The rate of return in the example above has been calculated and stated on a periodic basis.
Rates of return are often also quoted on an annual basis, following the convention for the market in which the proposed deal is being negotiated.
