The realized rate of return is an important measure for investors, as it reflects the actual return on an investment over a specific period. To find the realized rate of return, follow these steps:
- Determine Your Initial Investment: Start by noting the amount of money you initially invested. This is commonly referred to as the principal.
- Calculate the Final Value of Your Investment: At the end of the investment period, determine how much your investment is worth. This includes any dividends, interest, or other earnings you have received.
- Use the Realized Rate of Return Formula: The formula to calculate the realized rate of return is:
Realized Rate of Return = (Final Value - Initial Investment) / Initial Investment - Convert to Percentage: To express the return as a percentage, you can multiply the result by 100. So the formula becomes:
Realized Rate of Return (%) = [(Final Value - Initial Investment) / Initial Investment] × 100
For example, if you invested $1,000, and at the end of the investment period, your investment is worth $1,200, the realized rate of return would be:
Realized Rate of Return = ($1,200 - $1,000) / $1,000 = 0.20
Hence, Realized Rate of Return (%) = 0.20 × 100 = 20%. This indicates you have made a 20% return on your investment over the period.