Return
A return is the gain or loss an investment generates over time. It can be expressed as a dollar amount (nominal) or as a percentage (rate of return). Returns may be reported gross (before fees, taxes, inflation) or net (after those costs). Total return for stocks includes both price change and income such as dividends or interest.
Key takeaways
- A positive return is a profit; a negative return is a loss.
- Returns are often annualized to compare investments with different holding periods.
- Nominal return shows price change; real return adjusts for inflation and other external factors.
- Total return adds income (dividends, interest) to capital gains.
- Return ratios (ROI, ROE, ROA) measure efficiency and profitability.
Measuring returns
- Holding period return (HPR): the return over the period an investment is held. It may be expressed as a dollar amount or a percentage (rate of return).
- Annualization: converting returns for different holding periods to an annual basis so they can be compared consistently.
Example (nominal return): Buy stock for $1,000, sell later for $1,200 with no distributions. Nominal return = $1,200 − $1,000 = $200. Percentage return (ROI) = ($200 ÷ $1,000) × 100 = 20%.
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Nominal vs. real return
- Nominal return: the raw gain or loss in currency terms, not adjusted for taxes, fees, or inflation.
- Real return: adjusts nominal return for inflation (and sometimes other external factors) to reflect changes in purchasing power. Real return gives a clearer picture of the investment’s true economic benefit.
Return ratios
Return ratios compare profit to the capital used to generate it.
- Return on Investment (ROI): (Gain ÷ Initial Investment) × 100.
- Return on Equity (ROE): Net income ÷ Average shareholder equity. Measures net income per dollar of equity.
- Return on Assets (ROA): Net income ÷ Average total assets. Measures profit generated per dollar of assets.
Use these ratios to benchmark performance against peers, sectors, or historical standards.
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Yield vs. return
- Yield typically refers to income generated by an investment (e.g., interest or coupon payments) expressed as a percentage of price or face value. Example: a bond with a $1,000 face value and $50 annual coupon has a 5% yield.
- Return includes yield plus capital gains or losses from changes in market price. In some contexts yield is treated as a subset of return.
Common questions
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Is a negative return possible?
Yes—negative returns indicate a loss. -
What is the risk-return tradeoff?
Higher expected returns generally require taking on higher risk. Low-risk assets (e.g., government bonds) typically offer lower expected returns than higher-risk assets (e.g., growth stocks). -
Gross return vs. net return:
Gross return = price change + income. Net return = gross return − fees, commissions, taxes. Real return further subtracts inflation. -
How does diversification affect returns?
Diversifying across uncorrelated assets and sectors can reduce portfolio volatility and the impact of any single security’s loss, potentially improving risk-adjusted returns without necessarily increasing risk.
Conclusion
Returns quantify how much an investment earns or loses. Understanding the difference between nominal, real, gross, and net returns—as well as the role of income (yield) and capital gains—helps investors compare opportunities and make decisions aligned with their risk tolerance and financial goals.