🎓 Prepared by students from Boğaziçi University

What is Return on Investment?

Return on investment (ROI) is a percentage metric measuring how much profit you earn relative to the amount invested, helping evaluate whether an investment is worthwhile.

Short answer

ROI is calculated as: ROI = (Gain − Cost) / Cost × 100%, expressed as a percentage. Higher ROI means better investment efficiency and returns.

ROI Comparison Across Four Investments

x: Investment · y: ROI (%)

Try it: interactive calculator

Return on Investment (ROI)

50%

= ((1,500-1,000)/1,000)*100

Total gain or return1,500 $Initial investment cost1,000 $

Step-by-step worked examples

You invest $1,000, sell for $1,250. What is your ROI?

Gain = $1,250 − $1,000 = $250
ROI = $250 / $1,000 × 100%
ROI = 25%
→ A 25% return on your initial investment

A rental property costs $100,000; after 5 years, profit is $25,000. ROI?

Gain = $25,000
ROI = $25,000 / $100,000 × 100%
ROI = 25%
→ Same 25% ROI despite longer time horizon (note: annualized would be 4.6%)

Stock purchase $500; sold at $575. ROI?

Gain = $575 − $500 = $75
ROI = $75 / $500 × 100%
ROI = 15%
→ A 15% return in a shorter period

Flashcards

Quick quiz

Q1.Investment: $1,000 initial, $1,350 final value. ROI?

Correct answer: B. Gain = $350; ROI = $350/$1,000 × 100% = 35%.

Q2.ROI = (Gain − Cost) / Cost × 100%. If Gain = $500, Cost = $2,000, ROI is…

Correct answer: B. ($500 − $2,000) = impossible; correct is ($500 / $2,000) × 100% = 25%.

Q3.Two investments: A gives 20% ROI, B gives 20% ROI. Always equal performance?

Correct answer: B. ROI ignores time and risk; same percentage can hide vastly different risks or timeframes.

Q4.Real estate: $50K invested, $7K annual profit. 5-year ROI?

Correct answer: B. Total gain over 5 years = $7K × 5 = $35K; ROI = $35K/$50K × 100% = 70%.

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Common mistakes

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ROI accounts for time automatically. — Correct: ROI is a snapshot; annualized ROI is needed to compare investments of different durations.

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Higher ROI always means better investment. — Correct: Higher ROI often correlates with higher risk; context, risk tolerance, and diversification matter.

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Negative ROI means total loss. — Correct: Negative ROI means the investment lost money, but the investment still exists (not zero).

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ROI is the same as profit. — Correct: Profit is absolute ($); ROI is profit as a percentage of initial cost.

FAQ

What is return on investment (ROI)?

A percentage metric measuring profit earned relative to the initial investment: ROI = (Gain − Cost) / Cost × 100%.

Why use ROI instead of profit?

ROI normalizes profit by investment size, allowing fair comparison across different-sized investments.

How do you annualize ROI?

Annualized ROI = (1 + ROI)^(1/years) − 1. Accounts for time, enabling apples-to-apples comparison.

Can ROI be negative?

Yes; negative ROI means the investment lost money (e.g., ROI = −20% means a 20% loss).