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 ...

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Old 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?
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Old Mar 8, 2011, 10:05am   #2
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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.
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Old Mar 8, 2011, 10:22am   #3
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Re: ROI Calculation

Getafix started this thread 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.
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Old Mar 8, 2011, 10:29am   #4
 
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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
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Last edited by Scotty2Cues; Mar 8, 2011 at 10:42am.
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Old Mar 8, 2011, 10:31am   #5
 
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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.
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Old Mar 8, 2011, 10:33am   #6
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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%
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Old Mar 8, 2011, 10:46am   #7
 
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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...
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Old Mar 8, 2011, 11:04am   #8
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Re: ROI Calculation

Getafix started this thread 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.
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Old Mar 8, 2011, 11:14am   #9
 
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Re: ROI Calculation

Quote:
Originally Posted by Getafix View Post
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
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Old Mar 8, 2011, 11:14am   #10
 
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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.
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