Rate of return

Discussion in 'After Hours Lounge (Off Topic)' started by Brian Perry, Jul 25, 2005.

  1. Brian Perry

    Brian Perry Cinematographer

    Joined:
    May 6, 1999
    Messages:
    2,807
    Likes Received:
    0
    Let's say you invest $100 per month for one year. At the end of the year, you have $1,500 ($1,200 invested and $300 gains). How would you calculate the rate of return? (On the surface it appears to be 25% but in reality it would be higher because the $1,200 wasn't fully invested for the whole year.)

    Thanks
     
  2. BrianB

    BrianB Producer

    Joined:
    Apr 29, 2000
    Messages:
    5,205
    Likes Received:
    1
    How much are you gaining per month?
     
  3. Brian Perry

    Brian Perry Cinematographer

    Joined:
    May 6, 1999
    Messages:
    2,807
    Likes Received:
    0

    Variable rates...it could be nothing some months or 40% in other months.

    I guess I'm wondering how mutual funds do it, where there are inflows and outflows each month.
     
  4. Denward

    Denward Supporting Actor

    Joined:
    Feb 26, 2001
    Messages:
    552
    Likes Received:
    0
    With mutual funds, you buy shares. The annualized percentage change in the share price between any 2 dates is what they quote as the fund's return. It would be the same return you would calculate if you didn't have money going in and out.

    In your example, let's say the share price is $10 on day one. Your $100 buys you 10 shares. Next month, the share price is $20 so you get 5 shares. At that point, you have 15 shares worth $20 each. At the end of 12 months, you've got x shares at a final price of y. In your example, x times y equals $1500. The mutual fund company would quote their own performance as 100 times (y-10)/10. Your own personal return is calculated by solving for i such that 100*[(1+i)+(1+i)^(11/12)+(1+i)^(10/12)+ ... +(1+i)^(1/12)]=1500 which I think works out to 47.6%.
     

Share This Page