How is monthly return calculated for an investment?

Disable ads (and more) with a membership for a one time $4.99 payment

Prepare for the UCF FIN3403 Business Finance Exam with our comprehensive study materials, including flashcards and multiple-choice questions. Each question comes with hints and explanations. Start your preparation now!

The calculation of the monthly return for an investment is done by comparing the price of the investment at the end of the period (P1) to the price at the beginning of the period (P0). The correct formula captures the change in value as a proportion of the initial value.

To understand this, the return is calculated as the difference between the final price and the initial price, divided by the initial price. This is expressed as:

[ \text{Return} = \frac{P1 - P0}{P0} ]

This simplifies to:

[ \text{Return} = \frac{P1}{P0} - 1 ]

Thus, the formula presented as P1/P0 - 1 accurately reflects how much the value of the investment has changed relative to its starting value, indicating whether the investment has appreciated or depreciated in value.

In this context, P0 represents the price at the beginning of the period, and P1 represents the price at the end of the period. A positive return indicates that the investment has increased in value, while a negative return represents a decrease. This method is widely used in finance to analyze an investment's performance over time.