Return on investment

Definition

Return on Investment (ROI) measures the gain or loss generated on an investment relative to the amount of money invested. It is typically expressed as a percentage and helps evaluate the efficiency or profitability of an investment.

5 Must Know Facts For Your Next Test

1. ROI is calculated using the formula: ROI = (Net Profit / Cost of Investment) x 100.
2. A positive ROI indicates a profitable investment, while a negative ROI signifies a loss.
3. ROI can be used to compare the profitability of different investments.
4. Factors like time horizon and risk should be considered when evaluating ROI.
5. ROI does not account for external factors such as inflation or market volatility.

Review Questions

• What is the formula for calculating Return on Investment?
• Why is it important to consider both time horizon and risk when evaluating ROI?
• How can ROI help in comparing different investment options?

Related terms

Net Profit: The amount of money left after subtracting all expenses from total revenue.

Cost of Investment: The initial outlay of funds required to make an investment.

Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.