INTRODUCTION TO RETURN

1. INTRODUCTION TO RETURN
Ramya B
Assistant Professor
B.com(PA)
Sri Ramakrishna College of Arts and Science
Coimbatore - 641 006
Tamil Nadu, India
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2. RETURN
• A return, also known as a financial return, in its
simplest terms, is the money made or lost on
an investment over some period of time.
• A return can be expressed nominally as the
change in dollar value of an investment over
time. A return can also be expressed as a
percentage derived from the ratio of profit to
investment. Returns can also be presented as
net results (after fees, taxes, and inflation) or
gross returns that do not account for anything
but the price change.

3. The Basics of Return
• When you put money into an investment or
a business endeavor, ROI helps you
understand how much profit or loss your
investment has earned. Return on
investment is a simple ratio that divides the
net profit (or loss) from an investment by its
cost. Because it is expressed as a
percentage, you can compare the
effectiveness or profitability of different
investment choices. It is closely related to
measures like return on assets (ROA) and
return on equity (ROE).

4. Calculate Return
• To calculate return on investment, divide the amount you earned from an investment—often called the
net profit, or the cost of the investment minus its present value—by the cost of the investment and
multiply that by 100. The result should be represented as a percentage. Here are two ways to represent
this formula:
ROI = (Net Profit / Cost of Investment) x 100
ROI = (Present Value – Cost of Investment / Cost of Investment) x 100
• Let’s say you invested $5,000 in the company XYZ last year, for example, and sold your shares for
$5,500 this week. Here’s how you would calculate your ROI for this investment:
ROI = ($5,500 – $5,000 / $5,000) x 100
• Your return on investment in company XYZ would be 10%. This simple example leaves out capital gains
taxes or any fees involved in buying or selling the shares, but a more realistic calculation would factor
those into the cost of the investment.

5. Historical Returns
• Historical returns are often associated with the past performance of a
security or index, such as the S&P 500. Analysts review historical return
data when trying to predict future returns or to estimate how a security
might react to a particular situation, such as a drop in consumer
spending. Historical returns can also be useful when estimating where
future points of data may fall in terms of standard deviations.
• Analyzing historical data can provide insight into how a security or
market has reacted to a variety of different variables, from
regular economic cycles to sudden, exogenous world events. Investors
looking to interpret historical returns should bear in mind that past
results do not necessarily predict future returns. The older the historical
return data, the less likely it'll be successful at forecasting returns in the
future.
• Investors can calculate the historical return for any investment,
including the value of a home, real estate, mutual funds and exchange
traded funds (ETFs), which are funds containing a basket of various
securities. Investors also use historical returns to measure the price
performance of commodities such as corn, wheat, gold, and silver.

6. Calculation of Historical Returns
• Calculating or measuring the historical
return of an asset or investment is
relatively straightforward.
• Subtract the most recent price from the
oldest price in the data set and divide the
result by the oldest price. We can move
the decimal two places to the right to
convert the result into a percentage.
• For example, let's say we want to calculate
the return of the S&P 500 for 2019. We
start with the following data:

7. 2,506 = the S&P 500 closing price on December 31,
2018
3,230 = the S&P 500 closing price on December 31,
2019
3,230 - 2,506 = 724
724/2,506 = .288 or 29%*
*The returns were rounded to the nearest number.1
• The process can be repeated if an investor wanted
to calculate the return for each month, year, or any
period. The individual monthly or yearly returns can
be compiled to create a historical return data set.
From there, investors and analysts can analyze the
numbers to determine if there are any trends or
similarities between one period or another.

8. EXPECTED RETURN
• The expected return is a tool used to determine whether an
investment has a positive or negative average net outcome. The sum
is calculated as the expected value (EV) of an investment given
its potential returns in different scenarios, as illustrated by the
following formula:
• where "i" indicates each known return and its respective probability in
the series
• The expected return is usually based on historical data and is
therefore not guaranteed into the future; however, it does often set
reasonable expectations. Therefore, the expected return figure can be
thought of as a long-term weighted average of historical returns.In the
formulation above, for instance, the 5% expected return may never be
realized in the future, as the investment is inherently subject
to systematic and unsystematic risks.
• Systematic risk is the danger to a market sector or the entire market,
whereas unsystematic risk applies to a specific company or
industry.When considering individual investments or portfolios, a more

9. • When considering individual investments or portfolios, a more formal equation for the
expected return of a financial investment is:
Expected return = risk free premium + Beta (expected market return - risk free
premium).
where:
ra = expected return;
rf = the risk-free rate of return;
β = the investment's beta; and
rm =the expected market return
• In essence, this formula states that the expected return in excess of the risk-free rate
of return depends on the investment's beta, or relative volatility compared to the
broader market.
• The expected return and standard deviation are two statistical measures that can be
used to analyze a portfolio. The expected return of a portfolio is the anticipated
amount of returns that a portfolio may generate, making it the mean (average) of the
portfolio's possible return distribution. The standard deviation of a portfolio, on the
other hand, measures the amount that the returns deviate from its mean, making it a
proxy for the portfolio's risk.