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The return consists of the income and the capital gains relative on an investment. It is usually
quoted as a percentage.
The general rule is that the more risk you take, the greater the potential for higher return and
higher loss.
TYPES OF RETURNS
Returns are normally classified into two types. They are as follows-
TYPES OF RETURNS
• Expected Returns refer to the amount one would anticipate to receive on an investment .
• It is important note, however, that the expected return is usually based on historical data and
is not guaranteed.
• For the most part, the expected return is a tool used to determine whether or not an
investment has a positive or negative average net outcome.
• In addition to expected return, wise investors should also consider the probability to return in
order to properly assess risk.
• After all, one can find instance in which certain lotteries offer a positive expected return,
despite the very low probability of releasing that return.
• Expected return can be calculated :-
1. Using Simple Average (Expected Returns- without
probability)
∑𝑅
ത
𝑅=
𝑁
Where,
ഥ =Expected Returns
𝑹
R=Annual Returns
N=Number of years
2. Using Weighted Average (Expected Returns- with
probability)
ത
𝑅=∑P ×R
Where,
ത Expected Returns
𝑅=
P= Probability
R= Annual Returns
II. REALISED RETURNS
Realised returns refer to the actual amount of return earned on a security investment over a
period of time.
This period of time is typically the holding period which may differ from the expected yield of
maturity.
In finance, holding period return (HPR) is the total return on an asset or portfolio over a
period during which it was held.
It is one of the simplest and most important measures of investment performance.
HPR is the change in the value of an investment, asset or portfolio over a particular period.
It is the entire gain or loss, which is the sum income and capital gains, divided by the value at
the beginning of the period.
• Annualized return is the return that an investment provides over a period of time, expressed
as a time weighted annual percentage.
• It represents the yearly movement (increase or decrease) in the value of an investment,
including the effect of compounding.
• Sources of returns can include dividends, returns of capital and capital appreciation.
• Annual return is the method of comparing the performance of investment with liquidity,
which includes stocks, bonds, funds, commodities and some types derivatives.