In simple words, The rate of return is the gain experienced over a period of time expressed in terms of the initial investment.
How to Calculate Rate of Return
To understand the concept more deeply let me show you an example.
Let’s say your company is considering buying an investment product sold by JPMorgan that requires an outlay of $100,000 today and generates a payoff of $120,000 next year.
In this example, the rate of return is calculated by dividing the Gain and initial investment multiply by 100.
If Initial investment was $100,000 and payoff is $120,000 that means total profit is $20,000.
That means according to above formula, Rate of return is 20%.
Keep in mind this is an annual rate of return, since the payout is one year after the investment is made.