- Trending Categories
Data Structure
Networking
RDBMS
Operating System
Java
iOS
HTML
CSS
Android
Python
C Programming
C++
C#
MongoDB
MySQL
Javascript
PHP
Physics
Chemistry
Biology
Mathematics
English
Economics
Psychology
Social Studies
Fashion Studies
Legal Studies
- Selected Reading
- UPSC IAS Exams Notes
- Developer's Best Practices
- Questions and Answers
- Effective Resume Writing
- HR Interview Questions
- Computer Glossary
- Who is Who
What constitutes a return on a single asset? How is it calculated?
The typical reason for an investor to invest in a financial instrument is to make current income from dividends and interest income. For a stable company, the investments will earn a reasonable return that is the Expected Rate of Return (ERR) on given investments. Some investments such as debentures, bank deposits, public deposits, bonds, etc. carry a predetermined fixed rate of return that is usually payable periodically.
Note − The sole aim of the investor investing in a single asset is to get the maximum returns. Some fixed income instruments offer less returns, but they are less risky too. Increasingly risky instruments offer higher returns.
In case of investments in company shares, there is no assurance of periodical payments as dividends, but it often offers higher returns than the above-mentioned instruments. Investing in the shares of companies have higher risks than fixed income instruments.
Another form of return available is in the form of capital appreciation. This return is the gap between the real purchase price and the price at which the asset can be sold, this can be a capital gain or capital loss for changes in the given market price of the shares.
The yearly rate of return can be calculated as follows −
$$\mathrm{R=\frac{D_{1}}{P_{0}}+\frac{(P_{1}-P_{0})}{P_{0}}=\frac{D_{1}+(P_{1}-P_{0})}{P_{0}}}$$
Where,
R = Yearly rate of return of a share
D1 = Dividends declared at the end of the year
P0 = Market price of share at the start of the year
P1 = Market price of share at the ending of the year
The above formula is used for determining the annual return of an investment in shares. Here,$\frac{𝐷_{1}}{𝑃_{0}}$represents the dividend yield. It is notable that the term in parentheses in the numerator of the above-mentioned equation gives the capital gain or loss.
When the price of the security at the end of the given period is higher than that at the beginning, then there is a "capital gain". On the other hand, if the ending price is less than the beginning price, then there is a "capital loss".
Note − Even though there is no capital gain/loss until the security is not sold, it should be taken into the calculation while determining the return on investments.
- Related Articles
- What is abnormal return and how is it calculated?
- How is the expected return on a portfolio calculated?
- How is Current Asset Turnover Ratio Calculated?
- How is the standard deviation and variance of a two-asset portfolio calculated?
- What is Terminal Value of a new business and how is it calculated?
- What is a risk-free asset?
- How is it possible to enter multiple MySQL statements on a single line?
- What is asset purchase agreement in an asset deal?
- What is Absolute Return and how is it measured?
- What is Asset Cost of Capital?
- How to return only a single property “_id” in MongoDB?
- What constitutes 55% of blood volume?
- How is RSA Algorithm Calculated?
- What is Single Sign On (SSO)?
- What is Capital Asset Pricing Model (CAPM)?
