Listen to a Business English Dialogue About Simple rate of return
Allison: Hi Autumn, do you know what a simple rate of return is in finance?
Autumn: No, I’m not familiar with that term. What does it mean?
Allison: A simple rate of return is a measure used to calculate the gain or loss on an investment, usually expressed as a percentage of the initial investment amount.
Autumn: Ah, I see. How do you calculate it?
Allison: You can calculate the simple rate of return by subtracting the initial investment amount from the final value of the investment, dividing that by the initial investment amount, and then multiplying by 100 to get the percentage.
Autumn: That sounds straightforward. Can you give me an example?
Allison: Sure. Let’s say you invested $1,000 in a stock and sold it a year later for $1,200. The simple rate of return would be ($1,200 – $1,000) / $1,000 100, which equals 20%.
Autumn: Got it. So, the simple rate of return tells us how much our investment grew or shrank over a certain period.
Allison: Exactly. It’s a simple way to assess the performance of an investment without considering factors like time value of money or compounding.
Autumn: That sounds useful for quickly evaluating investment opportunities. Are there any limitations to using the simple rate of return?
Allison: One limitation is that it doesn’t account for the time value of money, so it may not provide an accurate measure for longer-term investments or those with irregular cash flows.
Autumn: I see. So, investors might use other metrics in addition to the simple rate of return for a more comprehensive analysis.
Allison: Right. It’s important to consider the context of the investment and use multiple metrics to make informed decisions.
Autumn: Thanks for explaining, Allison. I feel like I have a better understanding of the simple rate of return now.
Allison: You’re welcome, Autumn. If you have any more questions, feel free to ask anytime.