Definition

The return on the investment after a year is called annual return. The main sources of return include capital gain, capital returns, and dividends. On the other hand, commissions, taxes, and fees cannot be considered as return on investment.

Explanation

The rate of return can be measured against the initial investment amount and represents a geometric mean instead of the arithmetic mean. For instance, an investor buys a stock on 1st January, 2015, for $30. He sells it on 1st January, 2020, for $45 with a profit of $15. An investor received an amount of $3 as a dividend for making an investment for 5 years. In this example, the total return of the investor is $18.

The annual return is the de facto method, used for the comparison of investment performance with liquidity, which includes funds, commodities, bonds, stocks, and a sort of derivatives.