## ROI Calculation

This is a discussion on ROI Calculation within the General Trading Chat forums, part of the Reception category; Hi All, I have had a heated debate about the meaning/calculation of ROI on another thread. I would be interested ...

 Mar 8, 2011, 8:50am #1 Joined Feb 2011 ROI Calculation Hi All, I have had a heated debate about the meaning/calculation of ROI on another thread. I would be interested to see what the consensus opinion is on this. I have my ideas but will not express them to not bias this discussion (not til the end anyway) To make this easier I have created an example: The investor has an initial bank of 12000. Investment 1 ------------ i) 4000 invested in company abc ii) 5000 invested in company def Positions closed: i) a profit of 500 for investment in abc ii) a profit of 100 for investment in def Investment 2 ------------ i) 12000 invested in company ghi position closed: i) a profit of 1200 for investment in ghi The question is: what is this investor's ROI over these investments?
 Mar 8, 2011, 10:05am #2 Joined Jul 2010 Re: ROI Calculation I'd say 5% for Investment 1 ((500 + 100)/12000 x 100) and 10% for Investment 2 (1200/12000 x 100). I think you really need to calculate ROI on the total available pool. To calculate your total return in business terms you'd also need to factor in other costs eg. computer, overheads etc but that obviously goes beyond the scope of the question.
 Mar 8, 2011, 10:22am #3 Joined Feb 2011 Re: ROI Calculation I said I wouldn't butt in til the end but I think I should clarify the question. What do you calculate as the "total" ROI.
 Mar 8, 2011, 10:29am #4 Joined Mar 2010 Re: ROI Calculation Id say only the % profit matters but at a guess I go investment 1) 6.7% ROI as our invested 9000 returned 600 investmenr 2) 10% ROI as our invested 12000 returned 1200 __________________ "The most powerful force in the universe is compound interest" Albert Einstein Golden: http://www.youtube.com/watch?v=63rcdLeXiU8 http://www.youtube.com/watch?v=_VotwwEtDx8 My Journal: http://www.trade2win.com/boards/trad...ive-trade.html Last edited by Scotty2Cues; Mar 8, 2011 at 10:42am.
 Mar 8, 2011, 10:31am #5 Joined Sep 2005 Re: ROI Calculation 15% (ie 1800/12000). Time is also a factor, so you should consider annualising - after all if he's done that in a month it's very different to doing it over a year, or five years.
 Mar 8, 2011, 10:33am #6 Joined Jul 2010 Re: ROI Calculation To calculate the ROI you simply divide the account value at the end of the period in question by the account value at the beginning period and multiple by 100 then subtract 100. So it's (12000 + 500 + 100 + 1200)/12000 x 100 - 100 = 15%
 Mar 8, 2011, 10:46am #7 Joined Mar 2010 Re: ROI Calculation In total we invested 21000 and returned 1800 so thats 8.6% which is the average of the 2 investments considered seperately. I dont know... __________________ "The most powerful force in the universe is compound interest" Albert Einstein Golden: http://www.youtube.com/watch?v=63rcdLeXiU8 http://www.youtube.com/watch?v=_VotwwEtDx8 My Journal: http://www.trade2win.com/boards/trad...ive-trade.html
 Mar 8, 2011, 11:04am #8 Joined Feb 2011 Re: ROI Calculation This dilemna in calculation is clearly shown by Scotty2Cues and Barramundi in the points above. I prefer one of these 2 methods and would argue that one of the two methods is clearly more useful as an indication of performance.
Mar 8, 2011, 11:14am   #9

Joined Mar 2010
Re: ROI Calculation

Quote:
 Originally Posted by Getafix This dilemna in calculation is clearly shown by Scotty2Cues and Barramundi in the points above. I prefer one of these 2 methods and would argue that one of the two methods is clearly more useful as an indication of performance.
If you have £100 and invest £1 and it returns £50, wouldnt it be better to say that your £1investment reutrned £50 and so your account grew by 50%. So its just relating risk to reward.

It doesnt really matter what its called or what roi is.

Just need to specify account, amount invested (risk) and reward
__________________
"The most powerful force in the universe is compound interest" Albert Einstein

 Mar 8, 2011, 11:14am #10 Joined Sep 2005 Re: ROI Calculation I don't think there's a dilemma, I think it's just a question of being precise in the terminology about what you're measuring. If you're referring to the 'other thread' that I think you are (!), the issue is that the OP wasn't being at all clear about what he was actually measuring and the more he was asked to clarify the more he obfuscated - although maybe that's not the thread you mean at all! The conventional way of measuring a return is to say: you've got a bank of £X now which was a bank of £Y when you started, so with all the various investments and trades you've made in the meantime you've generated a return of X/Y as a %. You would also want to be specific about the time frame. If you're going across longer time frames, then you'd probably start bringing in CAGR calculation to normalise it on an annual basis.
Mar 8, 2011, 11:35am   #11
Joined Feb 2011
Re: ROI Calculation

Quote:
 Originally Posted by Jack o'Clubs I don't think there's a dilemma, I think it's just a question of being precise in the terminology about what you're measuring. If you're referring to the 'other thread' that I think you are (!), the issue is that the OP wasn't being at all clear about what he was actually measuring and the more he was asked to clarify the more he obfuscated - although maybe that's not the thread you mean at all! The conventional way of measuring a return is to say: you've got a bank of £X now which was a bank of £Y when you started, so with all the various investments and trades you've made in the meantime you've generated a return of X/Y as a %. You would also want to be specific about the time frame. If you're going across longer time frames, then you'd probably start bringing in CAGR calculation to normalise it on an annual basis.
Hi Jack, I don't think the thread you refer to is the one I am talking about (it is my thread in sports betting - on Tennis Lays to which I refer) as it is very clear in my spreadsheet etc how the ROI is calculated. The discussion was I disagreed with other's perception of ROI.

From the posts so far though, maybe I am a little pedantic in my approach to ROI with too much emphasis on the word "Investment". I believe the portion of capital not being used in the investment should not be used in the denominator of the calculation (i.e., I agree with Scotty2Cues's interpretation) as it has no risk attached to it at that point in time.

Mar 8, 2011, 11:46am   #12
Joined Jul 2010
Re: ROI Calculation

Quote:
 Originally Posted by Getafix I believe the portion of capital not being used in the investment should not be used in the denominator of the calculation (i.e., I agree with Scotty2Cues's interpretation) as it has no risk attached to it at that point in time.
I think it should be used in the calculation as it was tied up in the investment pool and not available to be used for any other purpose.

Mar 8, 2011, 12:04pm   #13

Joined Sep 2005
Re: ROI Calculation

Quote:
 Originally Posted by Barramundi I think it should be used in the calculation as it was tied up in the investment pool and not available to be used for any other purpose.
Strongly agree.

 Mar 8, 2011, 12:11pm #14 Joined Feb 2011 Re: ROI Calculation strongly disagree lol
 Mar 8, 2011, 12:14pm #15 Joined Feb 2011 Re: ROI Calculation Seriously though... I look at this from a different perspective. I don't like risk aversion to have an impact on forseen performance I prefer to judge by underlying edge. Hence, preference for my version. Though I do appreciate in terms of judging mutual funds etc my version is no good because you can't get under the hood to see exact investments..