What does the rate of return (R) represent?

• A. The percentage the investor makes or wants to make
• B. The selling price
• C. The down payment
• D. The annual net income

Answer: (A)

Rate of return measures how much an investment earns relative to the amount invested, expressed as a percentage. This is why it represents the percentage the investor makes or wants to make: it shows the gain (or target gain) relative to the initial cost. For example, investing 100,000 and earning 8,000 in a year yields a rate of return of 8%. The selling price is just the asset’s price, the down payment is the upfront cash invested, and annual net income is the dollar amount earned—not the percentage. The rate of return combines the profit with the investment size to give a comparable performance metric.