The risk and return analysis concept is an integral part of the investment and finance cycle. One might expect to get a return on his investment of 15 percent per annum, but there will always be the possibility of not being able to achieve a 15 percent return. Return is merely a reward for investing since all investment entails a certain risk. Risk and return analysis aim to optimize yield by establishing a risk balance.
11+ Investment Return Analysis Templates in DOC | PDF
1. Management Return on Investment Analysis
2. Investment Risk Return Analysis Template
3. Comparative Analysis of Investment Returns Template
4. Investment Return Analysis & Portfolio Management
5. Return On Security Investment Analysis Template
6. Return on Investment Analysis for E-business Projects
7. Return on Investment Estimation Analysis Template
8. Project Investment Return Analysis Template
9. Return on Investment & Cost Benefit Analysis Template
10. Social Return on Investment Analysis Template
11. Forecasting Investment Returns Analysis Template
12. Bank Investment Services Returns Analysis Template
What Does Return of Investment Mean?
Return of Investment that is also known as ROI is generally referred to as a financial ratio that is used to calculate the benefit that an investor will receive concerning their investment cost. It is most frequently measured as net revenue separated by the investment’s original cost of capital. It has been observed that the higher the ratio, the greater the benefit earned.
What is the Formula for ROI?
There are various versions of the ROI formula and the two most commonly used are just provided below:
Net Income or Cost of Investment = ROI
Investment Gain or Investment Base = ROI
The first version of the ROI calculation is the most widely used ratio net income divided by the expense of investment. The simplest way of thinking about the ROI formula is to take some kind of “benefit” and divide it by the “cost” When someone says something has a good or bad ROI, they must be asked to clarify exactly how they measure it.
How Can You Use the ROI Formula Calculation?
ROI estimates are straightforward and allow an investor to determine if an investment advantage should be taken or missed. The estimate may also be an example of how an investment has gone so far. It can be an important indication to the investor about the value of their investment when an investment shows a positive or negative ROI. An investor can also separate the low-performing investments from high-performing investments using an ROI formula. Investors and portfolio managers may attempt to boost their investments with this kind of approach.
What Does Investment Risk Mean?
Risk is the probability that total returns will be less than the expected and historical returns. Some of the risk factors included deteriorating business fundamentals along with inflation and market volatility. The slowdown in the financial market is impacting asset prices, even if the fundamentals remain sound. Inflation results in a lack of buying power for your savings and increased costs and lower-income for companies.
Market conditions could be influenced by rising increased competition, higher interest rates, quality issues and the inability of management to execute strategic and operating plans. Poor conditions could lead to declining income, losses and ultimately a currency crisis.
Return VS. Risk
You can’t remove risk but you can maintain it by holding a globally competitive stock, bond, and other resources portfolio. The composition of your portfolio should be consistent with your financial aims and risk tolerance. Investment returns for riskier assets tend to be higher. Savings accounts, deposit certificates, and treasury bonds, for example, have lower rates of return since they are safe investments, whereas long-term returns are higher for growth stocks and other riskier assets.
What are the Considerations for Making Investment Decisions?
Some of your life events may require some adjustments to your long-term financial plan and this may include the asset mix in your investment portfolio. For instance, when you start your first job, the stock portion of your portfolio may be large, because you can afford to take more chances and want your assets to grow as quickly as possible. When you raise a family, your portfolio can turn into a balanced mix of stocks and bonds, and switch to mostly bonds and dividend-paying stocks as you approach retirement. Market moves may also require constant adjustments to the portfolio. For instance, following a sharp stock market rally, you may take some profits in stocks or invest in quality stocks at bargain prices following a sharp market correction.
What are the Benefits of the ROI Formula?
There are many advantages that every analyst should be aware of when using the return on investment ratio.
Easy and Simple to Calculate
The return on investment formula is sometimes used since the measurement is so easy. It needs only two figures-the gain and the cost. Since a “return” can mean different things for different people, the ROI formula is simple to use, since there is no clear “return” definition.
Return on investment is a commonly accepted term and if you use the equation in conversation, it’s almost assured that people will know what you’re talking about.
What are the Limitations of the ROI Formula?
Whereas the ratio is always very useful, the ROI formula often has certain weaknesses that are necessary to think about. Two key points worthy of consideration are given below.
Disregards the Factor of Time
A higher ROI figure doesn’t always mean a better option to invest. Two investments, for example, have the same 50 percent ROI. The first investment is done in three years, however, while the second investment takes five years to achieve the same yield. The same ROI for both types of investments distorted the larger picture but the investor quickly saw the better option when the time factor was applied. In the same period and the same conditions, the investor will equate two instruments.
Vulnerable to Manipulation
Depending on what ROI formula is used in the calculation an ROI calculation will differ between two people. The property equation discussed in the example section can be used by a marketing manager without accounting for extra costs such as maintenance costs, property taxes, sales fees, and legal costs. An investor needs to take a look at the real ROI, which covers all possible costs generated when the value of each investment rises.