What is Yearly Rate of Return Method?
Definition of Yearly Rate of Return Method
A method used to calculate gains or losses in an investment at the end of each year is called yearly rate of return method. Yearly rate is also known as an annual percentage rate or nominal value.
Explanation of Yearly Rate of Return Method
Following are the steps for calculating yearly rate of return:
- Divide the amount of cash gained or lost at the end of the year by the initial investment.
- Multiply the rate of return with 12 if it is calculated on a monthly basis
Let’s suppose that a person hold 100 shares worth $10 each; therefore, his/her initial investment is $1,000 (100 x $10). If that person then collect $1 per share in cash dividend, and the finale share price is $10, then he/she have 100 times 1 or $100 in cash, plus $1,000 in shares. The total will be $1,100 ($1,000 + $100). So, the yearly rate of return is 100 divided by 1,000, which is equal to 3%.