How is Return on Investment (ROI) calculated?

Return on Investment (ROI) is calculated by determining the profitability of an investment relative to its cost. The correct method involves subtracting the initial investment cost from the final value of the investment to determine the net gain or loss. This net gain is then divided by the initial investment cost and usually expressed as a percentage.

This formula effectively measures how much profit has been made in relation to the amount invested, allowing investors to assess the efficiency and profitability of different investments. By focusing on both the gains from the final value and the cost of the initial investment, this method provides a clear indicator of performance and helps investors make informed decisions about where to allocate their resources.

For example, if an investment of $1000 grows to be worth $1200, the ROI would be calculated as follows:

1. Subtract the investment cost from the final value: (1200 - 1000 = 200).

2. Divide the net gain by the initial cost: (200 / 1000 = 0.2).

3. Multiply by 100 to convert to a percentage: (0.2 \times 100 = 20%).

Thus, the 20% ROI indicates that the investor earned a 20% return on