It may be measured either in absolute terms (e.g., dollars) or as a percentage of the amount invested.
A loss instead of a profit is described as a negative return, assuming the amount invested is greater than zero.
Return measures the increase in size of an asset or liability or short position.
A negative initial value usually occurs for a liability or short position.
According to the CFA Institute's Global Investment Performance Standards (GIPS),[3] This is because an annualized rate of return over a period of less than one year is statistically unlikely to be indicative of the annualized rate of return over the long run, where there is risk involved.
Note that this does not apply to interest rates or yields where there is no significant risk involved.
This formula can also be used when there is no reinvestment of returns, any losses are made good by topping up the capital investment and all periods are of equal length.
They are useful evaluating and comparing cases where the money manager controls cash flows, for example private equity.
(Contrast with the true time-weighted rate of return, which is most applicable to measure the performance of a money manager who does not have control over external flows.)
satisfying the following equation: where: and When the internal rate of return is greater than the cost of capital, (which is also referred to as the required rate of return), the investment adds value, i.e. the net present value of cash flows, discounted at the cost of capital, is greater than zero.
Note that there is not always an internal rate of return for a particular set of cash flows (i.e. the existence of a real solution to the equation
This pattern is not followed in the case of logarithmic returns, due to their symmetry, as noted above.
For example, if an investor puts $1,000 in a 1-year certificate of deposit (CD) that pays an annual interest rate of 4%, paid quarterly, the CD would earn 1% interest per quarter on the account balance.
It is not meaningful to compound together returns for consecutive periods measured in different currencies.
To calculate the capital gain for US income tax purposes, include the reinvested dividends in the cost basis.
The investor received a total of $4.06 in dividends over the year, all of which were reinvested, so the cost basis increased by $4.06.
For U.S. income tax purposes therefore, dividends were $4.06, the cost basis of the investment was $104.06 and if the shares were sold at the end of the year, the sale value would be $103.02, and the capital loss would be $1.04.
Investors and other parties are interested to know how the investment has performed over various periods of time.
In the 1990s, many different fund companies were advertising various total returns—some cumulative, some averaged, some with or without deduction of sales loads or commissions, etc.
Subsequent to this, apparently investors who had sold their fund shares after a large increase in the share price in the late 1990s and early 2000s were ignorant of how significant the impact of income/capital gain taxes was on their fund "gross" returns.
In reaction to this apparent investor ignorance, and perhaps for other reasons, the SEC made further rulemaking to require mutual funds to publish in their annual prospectus, among other things, total returns before and after the impact of US federal individual income taxes.
And further, the after-tax returns would include 1) returns on a hypothetical taxable account after deducting taxes on dividends and capital gain distributions received during the illustrated periods and 2) the impacts of the items in #1) as well as assuming the entire investment shares were sold at the end of the period (realizing capital gain/loss on liquidation of the shares).
Lastly, in more recent years, "personalized" brokerage account statements have been demanded by investors.
The fund records income for dividends and interest earned which typically increases the value of the mutual fund shares, while expenses set aside have an offsetting impact to share value.
Mutual funds report total returns assuming reinvestment of dividend and capital gain distributions.
That is, the dollar amounts distributed are used to purchase additional shares of the funds as of the reinvestment/ex-dividend date.
Reinvestment rates or factors are based on total distributions (dividends plus capital gains) during each period.
Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion) Solving for T gives
Mutual funds include capital gains as well as dividends in their return calculations.
Since the market price of a mutual fund share is based on net asset value, a capital gain distribution is offset by an equal decrease in mutual fund share value/price.