There is the likelihood that the actual return on investment would be different from the expected return. The investor’s return can either be:
- Greater than the expected return on his investment.
- Less than the expected return on his investment.
- Exactly what was expected, where the actual and expected returns are the same.
- No return on the investment; but the invested amount remains the same or
- Where all that has been invested is lost.
The return on an investment is the profit or loss on that investment. The return is usually expressed as a per cent of the initial investment. For example, if you invested $300 in purchasing a box of pencils and sold all for $360 then you would make a 20% profit. The return expressed as a percentage of the investment is calculated as follows:
(360-300) x 100 = 20%
If on the other hand the sale of the pencils only realized $260 then a loss would have been made. The percentage loss would be calculated thus:
(360-260) x 100 = -13.33%
The minus sign implies a loss. The percentage loss on the investment is 13.33%.
There is some degree of uncertainty associated with investing money. This uncertainty is referred to as risk. One would expect to be compensated for the risk that they are prepared to take for investing their money. If the risk is considered to be high then they expect the return to be high. If it is low, with little chance of losing the money invested, then the return on the investment will be low.