According to Investopedia a return on investment (ROI) “is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.” The return on investment formula:
“Average” Returns vs “Annualized” Returns
In short, when calculating the average return, Investment A that has a yearly return of 11% may actually have performed worse than Investment B that has a yearly return of 10%, if Investment A had a negative/s year/s and investment B did not. To get a true apples to apples comparison AND the actual return of an investment make sure to use the annualized return method of calculation.
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