Capital Growth can be defined as the percentage increase in the price of an asset over time. It is measured on the basis of its latest value and the amount spent on acquiring the asset in the past.
Steps
Method 1
Method 1 of 2:
Time Weighted Growth Rate
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Know the initial investment. Lets say you invested $100 in a share of a company.
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After a month, the share price is $105. So your monthly return can be calculated by a very simple formula. Return = ((final value - initial value) / initial value)Advertisement
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So the monthly return would be (105-100)/100 which is equal to 5%. now, this return can be annualized to find yearly return. The formula stays the same but as we only have a month's data, we need to raise it to the power of 12 as there are 12 months in a year. So the yearly return would be calculated as follows: (1.05^12)-1 = 0.7958 = 79.58%
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In a similar fashion, if we are given annual return and we want to find out monthly return, we can do it with the help of the following formula: ((1+r)^(1/n)-1) Here r= annual return; n= number of periods ( 12 in this case)
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So lets say if annual return is 25%, then monthly return would be ((1.25)^(1/12)-1) = 0.0187 = 1.87%. So 1.87% would be the monthly return and if you raise to the power 12, you would get 25% as annual return.Advertisement
Method 2
Method 2 of 2:
Money Weighted Growth Rate
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The difference between Time weighted and Money weighted growth rate is that money weighted growth rate takes into account the timing of cash flows and time weighted does not.
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Know the initial amount. Lets say your portfolio has $900 at the beginning of the month.
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Know the timing of cash flows in and out of the portfolio. Lets say on day 15th, a contribution of $50 is being made.
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Know the final amount. Lets say at the end of the month, the portfolio is valued at $1466.
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Calculation of return: The money weighted growth rate can be calculated as: final amount= (initial amount*(1+r)^n) + (CF*(1+r)^n). For this example it would be: 1466= (900*(1+r)^2) + (50*(1+r)^1). Here we are assuming that the month consists of 30 days and we are calculating 15 day return.
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Such calculations are quite difficult to do by simple calculator and would require a lot of trial and error. Using financial calculator is advised. The 15 day return would be equal to 24.9%. We can calculate the monthly return as ((1.24904^2)-1) = 56.01%.Advertisement
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Tips
- Use financial calculator if available as it would be quicker and easier.Thanks
- Time weighted returns are generally used and almost accepted and understood everywhere.Thanks
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