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How is average annual return calculated in Quicke=
n? What's an example of how return on investment (ROI) is calculated? View =
formulas, expanded definitions, and examples for key investment metrics.
The formula Quicken uses to calculate average annual return is:
where: |
cfi =3D cash flow or dollar amount of the <= em>ith transaction |
to=3D date of the ith transaction in days |
n =3D number of transactions for this security i= n the report range |
tj=3D number of days in the report ra= nge |
r =3D rate of interest (solving for r) |
Often called the internal rate of return (IRR), the average annual retur= n is usually defined as a percentage equal to the interest rate on a bank a= ccount that would give you the same total return on your investment. It tak= es into account money earned by the investment (interest, dividends, capita= l gains distributions) as well as changes in share price. Because it is an = annual rate, it acts like a bank interest rate that compounds annually. For= example, if you invest $10,000 and get an average annual return of 12.0 pe= rcent over two years, you'll have $12,544 (an increase of $2544, or 25.4 pe= rcent) at the end of the two years.
Quicken displays the average annual return in the Investment Performance= report and graph, in Portfolio columns, and in the Average Annual Return s= napshot. A negative value indicates a loss, which can be either paper or re= al. If the return seems surprisingly high, it could be because you've set a= short date range.
Amount invested is the actual dollar amount that you've invested in a se= curity to date. Amount invested includes any expenses (such as commissions = and fees) for that security. It does not include reinvested amounts, such a= s reinvested dividends, interest, or capital gains distributions.
By default, Quicken calculates the amount invested over your entire acco= unt history. Quicken can also report the amount invested for a specified da= te range. Change the date range by changing the Portfolio's From or As of d= ate or by using the standard Portfolio columns Amount Inv= ested 1-/3-/ 5-Year and Amount Invested= YTD.
When you change the Portfolio date range, Quicken calculates the amount = invested during that period to be the difference between the beginning amou= nt and ending amount of the date range:
When the Amount Invested changes, so do the calculations for = Return and ROI (%), which are ba= sed on the amount invested.)
Amount invested doesn't decrease when you sell shares (unless you sell a= ll shares of a given security=E2=80=94then it goes to zero), whereas cost b= asis does. If calculations such as ROI appear lower than you would expect, = it could be because the amount invested includes the cost of shares you no = longer own.
Cost basis equals the total cost to you of a security you purchased. It = includes commissions, fees, and mutual fund loads. It also includes all pur= chases, even reinvestments of dividends and capital gains distributions. Ho= wever, it excludes the cost of any shares you've sold or given away. Also, = it is reduced in a return-of-capital transaction.
Quicken assumes, unless you tell it otherwise, that the shares you sell = are the ones you've had the longest. You can tell Quicken which lots (or po= rtions of lots) to sell when you enter a Sell transaction.
After you set up a Quicken investment account, Quicken keeps track of th= e cost basis of each security. It takes the dollar amount you enter for the= first transaction involving a given security and uses this as the cost bas= is as of the date of the first transaction. Subsequent purchase costs are a= dded to the cost basis; the cost of shares subsequently sold and any return= of capital are subtracted from it.
To see your lots and cost basis at any time, open the Portfolio (choose = Investing tab > View > Portfolio) and expand the security you want in= formation about.
Return represents the total return of a security: the current market val= ue, plus the income taken out as cash, plus cash received from sales of sha= res, minus the amount invested.
Reinvestments are not explicitly added to the return, because they contr= ibute to the market value, which is already factored in.
Note that Return (%) YTD is based on downloaded data and is not affected= by changes in the As of date option.
Let's say you bought 100 shares for $5 each ($500 total). You later sold= 50 shares for $6 each ($300 total). Now the market price of your 50 remain= ing shares is $7 ($350 total).
The return is $350 (current market value), plus $300 (sales), minus the = $500 you invested, for a total return of $150.
Return on investment, or ROI, is defined as return divided by amount inv= ested. ROI indicates how well a security has performed: it is the total pro= fit (if ROI is positive) or loss (if ROI is negative) you would have from a= security if you sold your shares in it today. ROI is expressed as a percen= tage of the amount you invested in the security.
The ROI calculation includes price appreciation of your shares (as of th= e most recent available market price), plus dividend and other income you r= eceived, plus realized gain from shares you've sold.
Let's say you bought shares for $100 and received $5 in dividends, and t= oday the shares are worth $120. The amount invested is $100, the return is = $25 ($5 dividends plus the increase in market value). The ROI is 25/100 =3D= 0.25, displayed as 25 percent.
On this date | You made this transaction | At this price per share |
---|---|---|
12/31/98 | Bought 100 shares | $10 |
7/31/99 | Bought 50 shares | $15 |
12/31/99 | Received a dividend of $40, which = you reinvested in two more shares | $20 |
1/4/00 | Sold 20 shares | $18 |
If you change the date range in the Portfolio, the ROI also changes. Tha= t is because the date range helps determine the amount invested and return = values, which are used in ROI calculations. When you change the From or As = of date, you're effectively using a different date range and/or closing pri= ce.
Amount invested doesn't decrease when you sell shares; cost basis does. = If calculations such as ROI appear lower than you would expect, it could be= because the amount invested includes the cost of shares you no longer own.=
Note for our Canadian Customers
The following terms will be different in the Canadian releases of Quicke= n.
Canada: "Cheque" / United States: "Check"
Canada: "Colour" / United States: "Color"
Canada: "Centre" / United States: "Center"
Canada: "Realise" / United States: "Realize"
Canada: "Behaviour" / United States: "Behavior"
Canada: "Analyse" / United States: "Analyze"