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According to Wikipedia,

return on investment = (gain from investment – cost of investment) / cost of investment

However this calculation does not take into account the time passed between the invest and the return, so if I want to be able to compare different products, shouldn't I always calculate the effective compound interest rate?

i = (FV/PV)^(1/n) - 1
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  • Do you always know the future value and time span to plug into the formula?
    – JB King
    Commented Mar 25, 2015 at 19:27
  • @JBKing, yes, assuming I'm looking at past data (which is always the case I guess)
    – Sparkler
    Commented Mar 25, 2015 at 19:40
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    In view of the formula that you attribute to Wikipedia, if I invested $1000 into something (cost of investment) and received $1100 when I sold the investment, is my gain on investment $1100 or $100? That formula looks awfully weird unless gain on investment is supposed to mean the proceeds of the sale of the investment.
    – Dilip Sarwate
    Commented Mar 25, 2015 at 19:49

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Yes though I'd likely put a caveat on that. If you take short-term investments and extrapolate the results to get an annual result this can be misleading. For example, if a stock goes up 10% in a month, assuming this will continue for the next 11 months may not be a great idea. Thus, beware of how much data do you have in making these calculations.

When looking at long-term investments, the compound annual growth rate can be quite useful for comparison.

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  • so in long term investments one shouldn't look in ROI, right?
    – Sparkler
    Commented Mar 25, 2015 at 19:56

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