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Simple English definitions for legal terms
rate of return
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A quick definition of rate of return:
Rate of return refers to the amount of money earned from an investment each year, expressed as a percentage of the initial investment. It helps investors understand how much profit they can expect to make from their investment. A fair rate of return is the amount of profit that a public utility is allowed to earn, as determined by a public utility commission. Internal rate of return is a method used to evaluate the actual return on a long-term investment.
A more thorough explanation:
Rate of return refers to the percentage of annual income earned from an investment. It is a measure of the profitability of an investment and is calculated by dividing the annual income by the amount of the investment.
- If you invest $1,000 in a stock and earn $100 in dividends in a year, your rate of return is 10% ($100/$1,000).
- A real estate investor buys a property for $200,000 and earns $20,000 in rental income in a year. The rate of return on the investment is 10% ($20,000/$200,000).
These examples illustrate how rate of return is calculated and how it can be used to evaluate the profitability of different investments.