Talk:Rate of return

Merge with Internal rate of return ?

I also agree. A TWR is similar to a MWR, of which an IRR is a subset. It makes sense. An IRR is a type of return which is very important to asset mgmt firms.

I agree with the merge idea, but I would want to see redirects kept in the places of the merged articles, as IRR - at least - is a common term. Mmccalpin 13:37, 5 April 2006 (UTC)

The internal rate of return (I am not so sure) when I started the merging process, I never intended it to be one of them, maybe a quick reference. Internal rate of return has more to do with the time value of money, thus a projection or forcast; not a way to compute actual return and anlyse it.Paul.Paquette

Thier are many different rates of return, and each one has it positive and negative aspects. This article is an attempt to put some perspective to the various forms, and to develop a comprehensive understanding in the broader picture. Paul.Paquette

The internal rate of return on investment is a special concept of Enterprise Economics which might cause confusion if merged here. For this reason the article should be given a structure. I personally consider the ROI not necessarily be a percentage while rate of ROI would be a percentage. In newspapers etc. this difference seems NOT to be applied.

The equations and formulars I read already here merely are finance-mathematical methods to search for or handle time-rows of payments got. These are applied not only to ROI.

I would suggest to define ROI in this article as the difference between the costs of an investment including depreciations and the revenues caused by this investment.

Dipl.-Volkswirt (bdvb) Augustin (Political Economist) 18. April 2006

Having thought about it in more details some costs, revenues payments have to be left away to get the ROI. 1. companies tend to have revenues that are not linked to the subject of their business. Car producers for example sometimes sell real estate they don't need any longer. They get revenues then that are not caused or generated by their investments or by the capital used for building cars. 2. companies have costs that are not linked to investments or capital - for example common costs not cuased by the macine to produce a particular model offered by a car producer.

So to get the ROI some of the costs and revenues have to be removed from the profit-or-loss-calculation. And there several levels of aggregation - if the degree of aggregation is reduced then more of the costs and revenues have to be left away to get the correct ROI.

I tend to think that this should be focussed on.

Dipl.-Volkswirt (bdvb) Augustin (Political Economist) 19. April 2006 10:50 MEST

I disagree with the merge. The ROI is simply the return on a wide number of investments. The IRR is typically used for businesses when evaluating whether or not they should move forward with a project. It is used to discount the projected cash flows.

— Preceding unsigned comment added by 70.245.222.22 (talk • contribs) 22:29, April 28, 2006 (UTC)

Like User:Paul.Paquette, and User:Ekkehard Augustin (Dipl.-Volkswirt (bdvb) Augustin) and User:70.245.222.22, I disagree with merging rate of return with internal rate of return, which is a different concept, one used in evaluating whether a project should be undertaken. —Lowellian (reply) 10:47, 25 May 2006 (UTC)

Almost everybody seems to be against merging with Internal Rate of Return. This makes sense since IRR is a capital budgeting method and ROI is not. I have removed the tag Smallbones 10:11, 18 June 2006 (UTC)

I changed the title of this section to separate the discussions on different merges. I am also moving the remarks on merging with Rate of return on investment to separate section. Ruerd 09:01, 30 December 2006 (UTC)

rate of return

Efudd - Most mutual fund companies (to wit: Fidelity and Vanguard) display "total annual return" and "cumulative total return". It would be usefule to explain how those are calculated.

Also if I use as an example a $100 investment that gains 10% in the first six months and loses 10% in the final six months, with the arithmeic return calculation I get: Vi=100, Vf=99, ROR=(99-100)/100=-1% (how true: I lost 1% of my investment after one year!) and not zero as the text seems to imply. With the geometric average calculation I get: square root of (1.1*0.9)=0.995, equivalent to -0.5% which is actually higher than the result of the arithmetic average (i.e. it makes the rate of return look better than it really was!) I suspect that what mutual fund companies call cumulative total return are calculated using the arithmetic average formula, and what they call average annual total returns are calculated using the geometric average formula, but it would be nice if some expert could verify that and explain it clearly.

Total returns informed by mutual fund companies imply reinvestment of all profits, thus it has to be averaged geometrically, like you did in your example, be it cumulative or annual. I guess the difference between those two words, is that cumulative means for the whole period, which could be less than a year, several years or a non-integer amount of years, while annual means the return per year (could be the result of an average or "annualization" of the cumulative return).

On the other hand, I wouldn't say that returns have to be averaged geometrically always, because that holds only as long the gains are reinvested. If not, an arithmetic average would be the correct one, although (unlike IRR or NPV) it would reflect no information about when the profits are realized, so it would be kind of a poor measure, but at least not an incorrect one like a geometric average.--Andrés Djordjalian 01:43, 10 August 2007 (UTC)

On second thought, I think I remember reading about a criterion for incorporating timing in the those cases where profits are not reinvested (at least not in the same investment), which is considering that one will obtain the same return elsewhere, so we may use geometric averages all the same. So I wouldn't rush into saying that geometric averages are incorrect for those cases, as they may be if we use criteria like these.--Andrés Djordjalian 01:49, 10 August 2007 (UTC)

Trying to clarify ROI article

I'm trying to clarify the ROI article. How do I go back and ad edit notes?

Please sign your comments with ~~~~ mrholybrain 23:13, 2 September 2006 (UTC)

Things I Disagree With

"Cash Flow (Income Stream)": I don't agree with any of this section. It is the cash flow that determines the ROI. The ROI does not measure the cash flow.

"Annual Returns - An Annualized Rate of Return": I don't believe anyone uses the arithmetical average to state returns. Certainly no one in the finance business. The rate people quote is the rate that would equate all the other cash flows if compounded yearly at the rate.

"ROI Calculations for Various Uses": I think the first paragraph should be deleted. It is way off topic. In the second paragraph, to say "ROI values typically used include Dividend yield, Net profit margin and Return on assets" is wrong. ROI has nothing to do with these other measures. They measure completely different things, from the point of view of different groups of people.

There is more I disagree with, but I bet you wish I'd shushup 24.82.95.165 01:43, 7 September 2006 (UTC)justsaying

   If the cash flow determines the ROI, why don't you see the ROI as a 
   percentage/standardized measure of cash flow?

Because returns don't have to be realized in cash to be real. I hold stock for long periods. Each year I measure a ROI using the year-end market values. Don't you? I don't have to sell before I can claim a return.

What do you think of the wording "cash or potential cash" to cover this?

   Unfortunately many people don't know or don't consider the fact that computing an
   average of periodic percent values for returns doesn't always translate accurately to
   dollar returns. Finance textbooks include many examples where periodic percent returns 
   are averaged.  These textbooks do not clearly note that those average percents do not
   necessarily translate to dollar loss/gain.  And the popular press doesn't seem 
   to worry about talking about averages of +/- percents.

I know it is nice to think everyone else is stupid, but did you never stop to check their numbers. I have, and I know that the US and Canadian press and Mutual Funds always use the word 'average' simply because it is the only 'word' that is understood. What word do you use when talking to non-finance friends? They are not stupid. The percent they quote is the correct one - using correct compounding.

I KNOW everyone else is NOT stupid, but occasionally eveyone makes math errors, including me. I use "annualized." I also don't assume compounding, because that's a reinvestment option.

   Why is it off-topic to note how personal investors evaluate their investments?  

Because the topic is not "Metrics for valuation". There are dozens of ratios that mean different things... but don't measure return and don't include the investment. 'Rate of return' and ROI have specific meaning. Creating a brain dump doesn't help anyone.

Sorry if this seems like a brain dump. But frankly, I'm just trying to make some of the numbers clear to people who are interested in this Wikipedia topic. I'm doing the best I can. If I'm wrong on calculations or anything else, please correct the article.

   Why do you think that Dividend Yield, etc. aren't measures of Return on Investment?

Because dividends don't measure all the return. Because profit margins don't include an investment $, etc. These are valid valuation metric. But they are not 'rate of return' or ROI.

I've tried to address the issue of capital gains/losses. Anything you can add is greatly appreciated. 65.78.213.33 01:54, 15 September 2006 (UTC)

   Your feedback is greatly appreciated.

   65.78.215.4 02:05, 8 September 2006 (UTC)

Useful Edits

Recent edits have been useful in clarifying the article [other than those vandalism edits, which are, thankfully, gone].

If anyone has time, it would be helpful if you'd check the math and equations for mutual fund investments.

This article is rated as "in need of expert attention," but I'm not sure where the expert is. So keep those constructive edits coming!

Merge Rate of return on investment into this article ?

I suggest you merge Rate of Return with Rate of Return on Investment. The only caveat I can think of is that some contemporary investments use "return" to indicate compound/reinvestment "rate of return." I guess the FDIC keeps the banks honest regarding the difference between capital and return-on-capital, but the SEC can always say, "Didn't you read the fine-print footnote on page 14?" 65.78.214.71 02:46, 3 September 2006 (UTC)

agree, but what about the size of the page, it is getting even bigger this way--Afa86 02:02, 5 November 2006 (UTC)

I saw the remark that Rate of return on investment needs to be merged into this article. I think the information in Rate of return on investment is not very accurate and too verbose. I have added a link to the Mathematics of Interest rate setion of the Compount interest page and I think this does the merge. It is just one extra line but it still covers Rate of return on investment completely. The only thing that still needs to happen is deleting the page Rate of return on investment. Ruerd 08:54, 30 December 2006 (UTC)

The Rate of return on investment article doesn't seem to address a general audience by starting with the basics then moving into more esoteric/technical stuff. Don't know if the technical stuff is accurate. If it should be merged, who does it? SueHay 01:14, 3 February 2007 (UTC)

Exponential Decay of Returns

This section in the article seems to be about probability. Does it fit here? SueHay 01:24, 3 February 2007 (UTC)

This section talks about a very suspect (crankish) concept that doesn't appear in any reputable peer reviewed publication that I'm aware of. Perhaps the posting belongs in a "small firm effect" entry which indeed is a testable hypothesis within finance that has been entertained by some. The attempted use of the large law of large numbers here though is mistaken.

This needs to be read in conjunction with ROTI. (Return on Time Invested). I think this is a brilliant concept. It brings in the value of time which is becoming more and more vital a resource. A resource which is non renewable, nor compressible, and allows no compromise. It is important for any achiever to understand the value of time. I am also happy to read another article on ROTI by Chester J Bowling. This is available online at http://joe.org/joe/2001june/a2.html. We need to study more of this. —Preceding unsigned comment added by 202.134.160.9 (talk) 06:41, 19 February 2008 (UTC)

Return-on-Investment for capitial equipment purchasing decisions

ROI is often used to determine when to invest in equipment, especially equipment used in manufacturing. Something needs to be said about this. 24.61.20.91 00:43, 10 February 2007 (UTC)

There's information about this in capital budgeting. I'll add a link.65.78.215.108 18:26, 10 February 2007 (UTC)

Switch "Rate of Return" with "Return on Investment" article?

Currently the "Return on investment" contains a hard redirect to this article, Rate of Return. Im wondering if this should be turned around. The text in this article only mentions the term rate of return once, while ROI is used a lot more often. Also, the term ROI strikes me as being used more often then ROR. How about moving this article to "Return on Investment" and making a hard redirect out of the ROR article? --Excirial ^{(Talk,Contribs)} 14:50, 16 November 2007 (UTC)

I'd agree wholeheartedly to turning around the two terms in order of priority. ROI is a term that has become a business buzz word. Someone who then gets redirected if they're trying to figure out what is behind it, might think they've made a mistake. The same reasoning would apply to merging this article with "Carry" unless that would become a subsection. Making an article increasingly hard to swallow for anyone who doesn't have studying the subject as their main occupation in life, doesn't really improve it's quality in my book. —Preceding unsigned comment added by 80.171.253.215 (talk) 23:40, 5 December 2007 (UTC)

Beotian needs simple info

What ROI is typically considered good in corporate America ? Is 5% good ? I keep hearing 15% , but i don't know. I-do-do-you? (talk) 02:43, 13 January 2008 (UTC)

Disagree - "in finance, ROR ROI, or sometimes just return"

Appreciate the effort of all contributors.

"In finance, rate of return (ROR) or return on investment (ROI), or sometimes just return,"

I believe the the statement "or sometimes just return" maybe somewhat misleading. When I teach basic finance at university I'm more likely to use the term "return" to refer to holding period returns. I do use return in the context of ROR ROI ROE etc when discussing these areas, but would contest that these are referring more to accounting returns, more so than in 'pure' finance. Whilst I concede that I do teach accounting returns, I do not agree that "In finance" accounting returns are "sometimes just return,". I think it is misleading as it stands.

"or sometimes just return" should be deleted as it is confusing and does not add to a readers knowledge of finance.

Regarding the question of merging with IRR. As has been previously mentioned, the two are totally different. ROR ROI are more in line with accounting returns and IRR is in the category of project evaluation or capital investment, along with NPV and so forth.

Cheers Mark —Preceding unsigned comment added by Mark ok7 (talk • contribs) 08:48, 12 July 2008 (UTC)

I agree that the phrase "or sometimes just return" should be deleted. Finnancier (talk) 06:59, 23 August 2008 (UTC)

Annualized return - this section is over-simplified and not accurate

The section on annualized return is inaccurate. By simply multiplying or dividing the return (or the return period) by a factor which is proportional to the one year period, the model described fails to account for compounding. Now, I actually don't know the right formula for converting the return of an arbitrary period of time into an annualized return, but I hope somebody does, because the way it's described now is only accurate if there's no compounding at all, and in fact it's not even accurate for the little-used (in the real world) case of "simple interest". Beanluc (talk) 17:12, 18 July 2008 (UTC)

Removed paragraph

I've removed the following paragraph because it relates tangentially to the subject at hand.

"A stock share is partial ownership of a company, and the value of the stock depends on many factors, including the likelihood that the company will pay a dividend (a distribution of profit to shareholders). When stock shares are first offered for sale, the company receives the capital from the stock purchaser and uses the capital to operate its business. Once stock shares are sold to investors, the investors can sell the shares to other investors. Publicly-traded companies’ stock shares are bought and sold (traded) on the stock markets."

Finnancier (talk) 06:59, 23 August 2008 (UTC)