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rate of return

Page history last edited by PBworks 12 years, 2 months ago

Rate of Return

 

 

 

Measuring returns

 

Because we own an asset in order to consume in the future, we measure the value of an asset based on its rate of return over time. Does the asset become more valuable? or less? How does that value change compared to other assets (you could have owned)?

 

  • Calculation: (future value - today's value) / todays value = % rate of return

 

Predicting future returns

 

Since you can not know the future, you base your asset-decisions today based on your expected rate of return in the future.

 

Real Rate of Return

 

compare the rate of return of an asset vs. the inflation. For example, if your asset grows in value by 10%, but there was 5% inflation, then your real rate of return was only 10-5 = 5%. The key here, is that if you want to be more wealthy (ie. be able to have greater consumption power) then you have to become more wealthy in real terms, not just nominal (number) terms.

 

see also: interest

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