Return is the difference between the amount you invested and the amount you received back. It is considered a reward for investing or the level of profit from an investment. For example, if you lend Rs 1,000 to your friend for one year at a 5 percent annual interest rate, you will receive back Rs 1,050 at the end of the year. The additional Rs 50 you received above your original investment of Rs 1,000 is called the return. The size of the return depends on the rate of interest you charge. Higher the rate of interest you charge higher will be your retūrn.
Investors invest in an expectation of return. Other things held constant, investors always prefer a higher return to: lower. One as it increases their wealth. However, not all investments do guarantee a return. For example, the return from investment in Treasury bills (T-bills) is almost certain because it is guaranteed by the goveřnment. However, the rate of return on T-bills is lower.
On the other hand, the return from investment in shares of common stock issued by a corporation is less certain but the rate of return is higher. Thus, while choosing among investment alternatives, investors should consider both rate and certainty associated with investment returns.
In this section, we describe different components of return along with the importance of return, factors affecting the level of returns, the role of historical returns in estimating investment’s expected return, and the relationship between time value of money and return.
