Cumulative Return: Definition, Calculation, And Example

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What is Cumulative Return?

Welcome to the world of finance, where numbers and calculations rule the game. Today, we’re going to dive into the concept of cumulative return. If you’re wondering what cumulative return is, you’re in the right place.

Now, let’s break down the definition, calculation, and provide an example to give you a clear understanding of cumulative return.

Definition

Cumulative return, also known as compounded return, is a measure that calculates the total percentage gain or loss of an investment over a given time period. It is expressed as a percentage and is an important metric for investors as it helps them assess the performance of their investment portfolio.

Consider cumulative return as a measure of how well your investments have performed over time. It takes into account the impact of compounding, which means that the returns from one period are reinvested to generate additional gains or losses in the following periods.

Essentially, cumulative return tells you how much your initial investment has grown or shrunk since you made it. It considers both the price appreciation or depreciation of the investment and any income generated, such as dividends or interest.

Calculation

Calculating the cumulative return is relatively straightforward. Here’s how you can do it:

1. Start by determining the initial value of your investment (the amount you initially invested).
2. Next, calculate the final value of your investment (the current value of your investment).
3. Subtract the initial value from the final value to find the gain or loss.
4. Finally, divide the gain or loss by the initial value and multiply by 100 to express the result as a percentage.

Let’s break it down with an example:

Example

Suppose you invested $10,000 in a stock at the beginning of the year, and by the end of the year, the value of your investment has grown to $12,500. To calculate the cumulative return:

1. Initial value = $10,000
2. Final value = $12,500
3. Gain = Final value – Initial value = $12,500 – $10,000 = $2,500
4. Cumulative return = (Gain / Initial value) x 100 = ($2,500 / $10,000) x 100 = 25%

Therefore, in this example, the cumulative return of your investment is 25%.

Wrapping Up

Cumulative return is a vital tool for investors to measure the performance of their investment portfolio over a specific time period. By understanding and calculating cumulative return, investors can make informed decisions about their investments and track their progress over time.

Remember, the power of compounding can significantly impact your investment returns, so it’s essential to account for it when calculating the cumulative return. Now that you have a clear understanding of cumulative return, you can confidently assess the performance and growth of your investments.