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Investment. Discuss the two components that determine the return on investment. The components are (1) dollar...

  • Investment. Discuss the two components that determine the return on investment. The components are (1) dollar income-interest or dividend paid during the holding period and (2) the change in the value of investment.
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Answer #1

The return on an investment is determined firstly by the dollar income received from it. This may be in the form of interest in case of bonds or dividend in case of shares.

The second component that determines the ROI is the change in value of the investment. So if the price of a stock increases, there is an increase in the return on investment by way of change in price of the stock. If the price of stock decreases, there is a fall in the ROI.

Hence return on investment is computed as (Income + Price at the end- Initial investment)/ Initial investment

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