What does the return percentage formula represent?

The return percentage formula specifically measures the performance of an investment by calculating how much an investment has gained or lost relative to its initial value. The formula states that you take the ending value of the investment, add any cash flows that were received during the investment period, subtract the beginning value, and then divide this total by the beginning value. This result is then multiplied by 100 to express it as a percentage.

This approach provides a clear picture of the percentage return realized on the initial amount invested. By incorporating cash flows, you also account for any additional funds that may have been contributed or withdrawn during the investment period, which gives a more accurate measure of actual return on investment. This is critical for investors assessing the true performance of their investment relative to the money they initially put into it.

Understanding this formula is essential because it helps investors evaluate their investments based on a standardized return percentage, facilitating easier comparisons between different investment opportunities.