Investing & Returns: key terms, formulas and examples
Investing trades money today for expected returns tomorrow. ROI and payback judge a project, compounding grows it, and the rule of 72 estimates doubling time.
Example
At 8% a year, money doubles in about 9 years (72 ÷ 8).
Takeaway
Compare options by return per unit of risk, not return alone.
Key terms
- Dividend
- A share of profit paid out to shareholders.
- Bond
- A loan you give to a company or government for interest.
- Hedging
- Taking an offsetting position to reduce risk.
- Arbitrage
- Profiting from a price gap between two markets.
- Leverage
- Using borrowed money to magnify returns, and risks.
- Asset allocation
- How an investor splits money among stocks, bonds and cash.
- ETF
- A fund holding many assets that trades like a single stock.
- Risk tolerance
- How much loss an investor can accept without panicking.
Formulas
ROI(G − C) ÷ C × 100
Payback periodI ÷ CF
Return on equityNI ÷ E × 100
Return on assetsNI ÷ A × 100
Earnings per shareNI ÷ Shares
Price-to-earnings (P/E)Price ÷ EPS
Dividend yieldDPS ÷ Price × 100
Earnings yieldEPS ÷ Price × 100
Book value per shareE ÷ Shares
Price-to-bookPrice ÷ BVPS
PEG ratioP/E ÷ g
Payout ratioDPS ÷ EPS × 100
Sustainable growth rateROE × b
Compound annual growth (CAGR)((End ÷ Start)^(1 ÷ n) − 1) × 100
Effective annual rate((1 + r ÷ m)^m − 1) × 100
Required return (CAPM)Rf + β × (Rm − Rf)
Sharpe ratio(Rp − Rf) ÷ σ
Portfolio returnw × Ra + (1 − w) × Rb
Total stock return(End − Start + D) ÷ Start × 100
Current yieldC ÷ P × 100
Coupon paymentF × c
Money multiplier100 ÷ RR
Expected payoffp × G − (1 − p) × L
Profitability indexPV ÷ I
Perpetuity valueCF ÷ r
Growing perpetuityCF ÷ (r − g)
Cash-on-cash returnCF ÷ I × 100
Cap rateNOI ÷ V × 100
Loan-to-valueL ÷ V × 100
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