If you trade the forex markets regularly, chances are that a lot of your trading is of the short-term variety; i. From my experience, there is one major flaw with this type of trading: h igh-speed computers and algorithms will spot these patterns faster than you ever will. When I initially started trading, my strategy was similar to that of many short-term traders. That is, analyze the technicals to decide on a long or short position or even no position in the absence of a clear trendand then wait for the all-important breakout, i. I can't tell you how many times I would open a position after a breakout, only for the price to move back in the opposite direction - with my stop loss closing me out of the trade. More often than not, the traders who make the money are those who are adept at anticipating such a breakout before it happens.

Capital Budgeting. Financial Analysis. The required rate of return is the minimum return an investor expects to achieve by investing in a project. An investor typically sets the required rate of return by adding a risk premium to the interest percentage that could be gained by investing excess funds in a risk-free investment. The required rate of return is influenced by the factors noted below. The level of the required rate of return, if too high, effectively drives investment behavior into riskier investments.

A company or investor may insist on a higher required rate of return for what is perceived to be a risky investment, or a lower return on a correspondingly lower-risk investment. Some entities will even invest funds in negative-return government bonds if the bonds are perceived to be very secure. If an investment cannot return funds for a number of years, this effectively increases the risk of the investment, which in turn increases the required rate of return. The required rate of return must be layered on top of the expected inflation rate.

Thus, a high expected inflation rate will drastically increase the required rate of return. The required rate of return is useful as a benchmark or threshold, below which possible projects and investments are discarded. Thus, it can be an excellent tool for sorting through a variety of investment options. However, management might deliberately opt to ignore this metric and invest heavily in an area considered to be of long-term strategic importance to the business; in this case, the expectation is that the required rate of return will indeed be met, but at a point well in the future.

The required rate of return is not the same as the cost of capital of a business. The cost of capital is the cost that a business incurs in exchange for the use of the debt, preferred stock, and common stock given to it by lenders and investors. The cost of capital represents the lowest rate of return at which a business should invest funds, since any return below that level would represent a negative return on its debt and equity.

To calculate returns gross of fees, compensate for them by treating them as an external flow, and exclude accrued fees from valuations. Like the time-weighted return, the money-weighted rate of return MWRR or dollar-weighted rate of return also takes cash flows into consideration. They are useful evaluating and comparing cases where the money manager controls cash flows, for example private equity.

Contrast with the true time-weighted rate of return, which is most applicable to measure the performance of a money manager who does not have control over external flows. The internal rate of return IRR which is a variety of money-weighted rate of return is the rate of return which makes the net present value of cash flows zero. When the internal rate of return is greater than the cost of capital , which is also referred to as the required rate of return , the investment adds value, i.

Otherwise, the investment does not add value. Note that there is not always an internal rate of return for a particular set of cash flows i. There may also be more than one real solution to the equation, requiring some interpretation to determine the most appropriate one. Note that the money-weighted return over multiple sub-periods is generally not equal to the result of combining together the money-weighted returns within the sub-periods using the method described above, unlike time-weighted returns.

Ordinary returns and logarithmic returns are only equal when they are zero, but they are approximately equal when they are small. The difference between them is large only when percent changes are high. The geometric average rate of return is in general less than the arithmetic average return. The two averages are equal if and only if all the sub-period returns are equal. This is a consequence of the AM—GM inequality. The difference between the annualized return and average annual return increases with the variance of the returns — the more volatile the performance, the greater the difference.

The order in which the loss and gain occurs does not affect the result. This pattern is not followed in the case of logarithmic returns, due to their symmetry, as noted above. Investment returns are often published as "average returns". In order to translate average returns into overall returns, compound the average returns over the number of periods.

Over 4 years, this translates into an overall return of:. Over 4 years, this translates back into an overall return of:. Care must be taken not to confuse annual with annualized returns. An annual rate of return is a return over a period of one year, such as January 1 through December 31, or June 3, , through June 2, , whereas an annualized rate of return is a rate of return per year, measured over a period either longer or shorter than one year, such as a month, or two years, annualized for comparison with a one-year return.

In other words, the geometric average return per year is 4. Investments generate returns to the investor to compensate the investor for the time value of money. Factors that investors may use to determine the rate of return at which they are willing to invest money include:. The time value of money is reflected in the interest rate that a bank offers for deposit accounts , and also in the interest rate that a bank charges for a loan such as a home mortgage. The " risk-free " rate on US dollar investments is the rate on U.

Treasury bills , because this is the highest rate available without risking capital. The rate of return which an investor requires from a particular investment is called the discount rate , and is also referred to as the opportunity cost of capital. The higher the risk , the higher the discount rate rate of return the investor will demand from the investment. The annualized return of an investment depends on whether or not the return, including interest and dividends, from one period is reinvested in the next period.

If the return is reinvested, it contributes to the starting value of capital invested for the next period or reduces it, in the case of a negative return. Compounding reflects the effect of the return in one period on the return in the next period, resulting from the change in the capital base at the start of the latter period. The account uses compound interest, meaning the account balance is cumulative, including interest previously reinvested and credited to the account.

Unless the interest is withdrawn at the end of each quarter, it will earn more interest in the next quarter. The annualized return annual percentage yield, compound interest is higher than for simple interest because the interest is reinvested as capital and then itself earns interest.

The yield or annualized return on the above investment is 4. As explained above, the return, or rate or return, depends on the currency of measurement. In more general terms, the return in a second currency is the result of compounding together the two returns:. This holds true if either the time-weighted method is used, or there are no flows in or out over the period.

If using one of the money-weighted methods, and there are flows, it is necessary to recalculate the return in the second currency using one of the methods for compensating for flows. It is not meaningful to compound together returns for consecutive periods measured in different currencies. Before compounding together returns over consecutive periods, recalculate or adjust the returns using a single currency of measurement.

Again, there are no inflows or outflows over the January period. The answer is that there is insufficient data to compute a return, in any currency, without knowing the return for both periods in the same currency. Investments carry varying amounts of risk that the investor will lose some or all of the invested capital.

For example, investments in company stock shares put capital at risk. Unlike capital invested in a savings account, the share price, which is the market value of a stock share at a certain point in time, depends on what someone is willing to pay for it, and the price of a stock share tends to change continually when the market for that share is open. If the price is relatively stable, the stock is said to have "low volatility ".

If the price often changes a great deal, the stock has "high volatility". To calculate the capital gain for US income tax purposes, include the reinvested dividends in the cost basis. For U. Mutual funds , unit investment trusts or UITs, insurance separate accounts and related variable products such as variable universal life insurance policies and variable annuity contracts, and bank-sponsored commingled funds, collective benefit funds or common trust funds, all derive their value from an underlying investment portfolio.

Investors and other parties are interested to know how the investment has performed over various periods of time. Performance is usually quantified by a fund's total return. In the s, many different fund companies were advertising various total returns—some cumulative, some averaged, some with or without deduction of sales loads or commissions, etc.

To level the playing field and help investors compare performance returns of one fund to another, the U. Securities and Exchange Commission SEC began requiring funds to compute and report total returns based upon a standardized formula—so-called "SEC Standardized total return", which is the average annual total return assuming reinvestment of dividends and distributions and deduction of sales loads or charges.

Funds may compute and advertise returns on other bases so-called "non-standardized" returns , so long as they also publish no less prominently the "standardized" return data. That is, they had little idea how significant the difference could be between "gross" returns returns before federal taxes and "net" returns after-tax returns.

In reaction to this apparent investor ignorance, and perhaps for other reasons, the SEC made further rulemaking to require mutual funds to publish in their annual prospectus, among other things, total returns before and after the impact of US federal individual income taxes. These after-tax returns would apply of course only to taxable accounts and not to tax-deferred or retirement accounts such as IRAs.

Lastly, in more recent years, "personalized" brokerage account statements have been demanded by investors. In other words, the investors are saying more or less that the fund returns may not be what their actual account returns are, based upon the actual investment account transaction history.

This is because investments may have been made on various dates and additional purchases and withdrawals may have occurred which vary in amount and date and thus are unique to the particular account. More and more funds and brokerage firms are now providing personalized account returns on investor's account statements in response to this need. The fund records income for dividends and interest earned which typically increases the value of the mutual fund shares, while expenses set aside have an offsetting impact to share value.

When the fund's investments increase decrease in market value, so too the fund shares value increases or decreases. When the fund sells investments at a profit, it turns or reclassifies that paper profit or unrealized gain into an actual or realized gain. The sale has no effect on the value of fund shares but it has reclassified a component of its value from one bucket to another on the fund books—which will have future impact to investors.

At least annually, a fund usually pays dividends from its net income income less expenses and net capital gains realized out to shareholders as an IRS requirement. This way, the fund pays no taxes but rather all the investors in taxable accounts do. Mutual fund share prices are typically valued each day the stock or bond markets are open and typically the value of a share is the net asset value of the fund shares investors own.

Mutual funds report total returns assuming reinvestment of dividend and capital gain distributions. Reinvestment rates or factors are based on total distributions dividends plus capital gains during each period. US mutual funds are to compute average annual total return as prescribed by the U.

Securities and Exchange Commission SEC in instructions to form N-1A the fund prospectus as the average annual compounded rates of return for 1-year, 5-year, and year periods or inception of the fund if shorter as the "average annual total return" for each fund.

The following formula is used: [11]. Mutual funds include capital gains as well as dividends in their return calculations. From the shareholder's perspective, a capital gain distribution is not a net gain in assets, but it is a realized capital gain coupled with an equivalent decrease in unrealized capital gain. From Wikipedia, the free encyclopedia.

Do you buy the shares of company A or B or C? Do you ditch the stocks and go for a government bond? Which is better between company shares and government bonds? Why are some people die-hard fans of stocks while others swear by bonds? Some can however have some clauses which you may need to understand first as they may affect your returns.

The low risk levels of bonds makes them pay out lower returns. And the less the amount you put in, the less you will make out. Stocks on the other hand are more risky and better-paying. You simply get more earnings for risking your money. Not everyone is able to respond quickly to mitigate the risk involved in not selling at the right time. It is this scenario that makes investors want to forecast how much they are going to make before investing.

Since stocks generally provide higher returns than bonds, flocking to the stock market can only be a natural response. Choosing stock investment is great, but you have to choose the right company beforehand. The required rate of return is the minimum rate of earnings you are willing to take from a given investment. It is more of a threshold you set for yourself so that any investment which promises anything less than that will simply not warrant your attention.

There is no agency or organization which can set this for any investor. The only thing someone may do is to advise you based on your unique circumstances. There are at least three factors which will make the required rate of return differ between investors. Risk tolerance levels — risk tolerance is the capacity to tolerate or take risk. Whereas some people are very risk averse, some are very comfortable with the idea of risking their money.

Source: Forex Zone. If you are adventurous enough to risk your money, then it will be wise to know the level of risk you are willing to take. Investment goal — every investment made has a goal it wants to achieve. You may want to purchase a home in two years or buy a car.

You may want to raise enough money for college or even to start your own business. Whatever the goal, your investment is your trusted means to achieve it. With goals being different, simply because humans are different, then you need to know which kind of investment will best get you what you are aiming for. Intending to use an investment to reach a specific goal requires that you study the market a bit.

You will need to understand the industry you are investing in. Investment duration — how long do you want your money to remain invested? To answer this question, you need to have your investment goal clear. If you want to go to college next year, it means you only have 1 year to get the money needed.

Therefore, your investment goal will be what determines your investment duration. Your investment duration will then determine which stocks you can buy. This calls for an understanding of how investments work. First, find out which industry is growing faster than the others. Then find out what is making it grow. This is what you will be watching because anything happening to it will affect stock prices. What are trends? What have analysts been saying? Equip yourself accordingly, otherwise, invest in an experienced analyst who can advise you.

The only drawback to using an analyst is that you will likely be paying him. Your investment will always be affected by inflation rates. And not only your investment, but also your returns. When life is expensive, the value of money goes down as it is no longer able to buy what it used to buy.

This means that the money investors have set aside for investment will reduce as they take care of other life matters. Eventually, investments will reduce. Demand for stocks will go down as the supply either remains or goes up as companies look for more money. On the side of inflation and your returns, the money you get will also be subject to inflation. Inflation will affect your purchasing power and so your returns will be of lower value in case of a higher inflation rate.

Source: Tutor2u. Bearing this in mind, any time you are calculating the required rate of return, you have to factor in inflation. Liquidity is the ease of selling something off and getting cash. Investments have a liquidity which you have to determine. If a stock is liquid, then it can easily be traded. This comes down to the demand which is affected by among other things, the profitability of the company or industry.

If the investment you are about to make may not be salable for a duration of time, then it bears more risk. The investment world is full of words which may leave you a bit confused. Some may seem very similar. Two potentially confusing terms we will look at are the required rate of return and the expected rate of return.

The required rate of return, as we have already mentioned, is the minimum investment return you can consider before putting your money into it. It is the threshold. This is the return you are looking to receive from an investment. For you to calculate the expected rate of return, the investment must have first of all passed the required rate of return test. You will then be seeking to find out just how much you are going to make in that particular investment. To make it easy to differentiate these two, just remember that one is the determining factor while the other is the profitability factor.

It is of great importance to understand that investments are risky, especially in the stock market. If you want guaranteed returns, then look to the risk-free investments which come in the form of bonds. Those however have lower returns. Many investors like to pick a required rate of return before making an investment choice.

The formula to calculate the rate of return RoR is:. This simple rate of return is sometimes called the basic growth rate , or alternatively, return on investment ROI. If you also consider the effect of the time value of money and inflation, the real rate of return can also be defined as the net amount of discounted cash flows DCF received on an investment after adjusting for inflation.

The rate of return calculations for stocks and bonds is slightly different. The simple rate of return is considered a nominal rate of return since it does not account for the effect of inflation over time. Discounting is one way to account for the time value of money. Once the effect of inflation is taken into account, we call that the real rate of return or the inflation-adjusted rate of return.

A closely related concept to the simple rate of return is the compound annual growth rate CAGR. The CAGR is the mean annual rate of return of an investment over a specified period of time longer than one year, which means the calculation must factor in growth over multiple periods.

To calculate compound annual growth rate, we divide the value of an investment at the end of the period in question by its value at the beginning of that period; raise the result to the power of one divided by the number of holding periods, such as years; and subtract one from the subsequent result. The rate of return can be calculated for any investment, dealing with any kind of asset. Let's take the example of purchasing a home as a basic example for understanding how to calculate the RoR.

Six years later, you decide to sell the house—maybe your family is growing and you need to move into a larger place. The simple rate of return on the purchase and sale of the house is as follows:. The same equation can be used to calculate your loss, or the negative rate of return, on the transaction:. Discounted cash flows take the earnings of an investment and discount each of the cash flows based on a discount rate.

The discount rate represents a minimum rate of return acceptable to the investor, or an assumed rate of inflation. In addition to investors, businesses use discounted cash flows to assess the profitability of their investments. If the sum of all the adjusted cash inflows and outflows is greater than zero, the investment is profitable. The rate of return using discounted cash flows is also known as the internal rate of return IRR. The internal rate of return is a discount rate that makes the net present value NPV of all cash flows from a particular project or investment equal to zero.

IRR calculations rely on the same formula as NPV does and utilizes the time value of money using interest rates. The formula for IRR is as follows:. Securities and Exchange Commission. Financial Ratios.

This is why return rates in ecommerce should never be taken at face value. Calculating your ecommerce return rate is quite simple. So, if you sold 15, units within six months and had units returned, your return rate would be:. However, your Rate of Return is a very high-level metric. This is why your ecommerce return rate should always be looked at alongside more detailed metrics, such as:.

Your refund rate is exactly what it sounds like, the total number of refunds versus your total number of returns. So, if we continue with the above example with returned units and refunds, your refund rate would be expressed like this:. Returns and refunds are often conflated in discussions about returns management. For example, if a customer has swapped a pair of sneakers for a different size, this would be considered an exchange. Your exchange rate is calculated by dividing your exchanges by the total number of returned orders.

So, with returned units and exchanges, your exchange rate would be. In an ideal world, your exchange rate should always be higher than your refund rate. This is because if a product is the wrong size or color, it should be a straightforward process to swap it for the correct item. As well as saving you from losing revenue, seamless exchanges add a huge amount of value to the customer experience.

An easy exchange process with expert recommendations shows your customers that you care about offering a positive post-purchase experience, thus increasing brand loyalty. By tracking your exchange rate, you can understand whether your brand is successful in steering customers towards more desirable return behaviors. Ecommerce has always boasted a higher return rate than brick and mortar stores. This is partly due to the inability of consumers to view and try products in advance. However, key differences in the online shopping journey also mean that consumer behaviors are very different than offline.

For example, many online retailers use free shipping thresholds to entice customers to spend more money. But if an online store also offers free returns, this enables customers to add additional items to their cart to qualify with the intent of returning. Other popular practices include bracketing , where consumers buy multiple versions of the same item to avoid having to make exchanges. Return rates can also be skewed by peaks such as the holiday season, which typically create a huge spike in return activity.

Yet this gives no context to how return rates vary hugely between different types of products. This means that some ecommerce businesses will require more sophisticated returns management strategies than others. When we break down return rates by product type, this is where things get a bit more interesting:. At first glance, beauty and home furnishings might not appear to have much in common.

But they both provide excellent case studies for how retailers can lower their return rates using AR technology. By utilizing returns data from Narvar, we can once again see how reasons for returning affect some product categories more than others:. Because customer expectations for the returns process have never been higher. Matters have been made tougher by the COVID pandemic, which has caused consumers to rely more heavily on ecommerce to fulfill their needs.

If you put in place a deliberately complex return policy to discourage customers from making returns, your refund rate will drop. But so too will your retention rate. For example, practices such as forcing customers to take store credit instead of a refund will certainly boost your exchange rate. Such hardball tactics are likely to push them away from your business once that credit is redeemed. But by looking at returns as a tool for growth, they can become a fantastic driver of profit and customer loyalty.

Because contrary to popular belief, serial returners CAN be good for your business. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end. A rate of return RoR can be applied to any investment vehicle, from real estate to bonds, stocks, and fine art.

The RoR works with any asset provided the asset is purchased at one point in time and produces cash flow at some point in the future. Investments are assessed based, in part, on past rates of return, which can be compared against assets of the same type to determine which investments are the most attractive.

Many investors like to pick a required rate of return before making an investment choice. The formula to calculate the rate of return RoR is:. This simple rate of return is sometimes called the basic growth rate , or alternatively, return on investment ROI. If you also consider the effect of the time value of money and inflation, the real rate of return can also be defined as the net amount of discounted cash flows DCF received on an investment after adjusting for inflation.

The rate of return calculations for stocks and bonds is slightly different. The simple rate of return is considered a nominal rate of return since it does not account for the effect of inflation over time. Discounting is one way to account for the time value of money. Once the effect of inflation is taken into account, we call that the real rate of return or the inflation-adjusted rate of return. A closely related concept to the simple rate of return is the compound annual growth rate CAGR.

The CAGR is the mean annual rate of return of an investment over a specified period of time longer than one year, which means the calculation must factor in growth over multiple periods. To calculate compound annual growth rate, we divide the value of an investment at the end of the period in question by its value at the beginning of that period; raise the result to the power of one divided by the number of holding periods, such as years; and subtract one from the subsequent result.

The rate of return can be calculated for any investment, dealing with any kind of asset. Let's take the example of purchasing a home as a basic example for understanding how to calculate the RoR. Six years later, you decide to sell the house—maybe your family is growing and you need to move into a larger place.

The simple rate of return on the purchase and sale of the house is as follows:. The same equation can be used to calculate your loss, or the negative rate of return, on the transaction:. Discounted cash flows take the earnings of an investment and discount each of the cash flows based on a discount rate. The discount rate represents a minimum rate of return acceptable to the investor, or an assumed rate of inflation.

In addition to investors, businesses use discounted cash flows to assess the profitability of their investments. If the sum of all the adjusted cash inflows and outflows is greater than zero, the investment is profitable. The rate of return using discounted cash flows is also known as the internal rate of return IRR.

The internal rate of return is a discount rate that makes the net present value NPV of all cash flows from a particular project or investment equal to zero.

Interpreting Rate of Return Formula If the old or starting value is lower, then you have a positive rate of return - a percent increase in. The required rate of return is the minimum return an investor expects to achieve by investing in a project. If set too high, it can trigger. Low-risk investments are great for those that want to accumulate money over time without the chance of losing that hard-earned cash.