If I buy a share for $25 and sell it for $50, my profit is $25. If that takes 5 year what would be the average annual rate of return on my investment?

About 14.8%.

Here's why: start with the formula: Return = (1+i)^Yrs. In this case Return = 2, and Yrs = 5. You can then restate this formula as: 1+i = Return ^ (1/Yrs), and solve for I.

A useful short cut that you can use to estimate returns that double your money is the "Rule of 72." You divide the number 72 by the rate of return in percent to see how many years it takes to double, or conversely divide 72 by the number of years it takes to double to estimate the rate of return. Here 72/5 = 14.4, which is pretty close to the more accurate method described above.

your return is 100% all over 5 years.. because you double your capital from 25 to 50..
therefore your annual return will be 100/5 = 20%
your annual return is 20%

Quote:

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Originally Posted by jojoo

ur return is 100% all over 5 years .. because you double your capital from 25 to 50..
therefore your annual return will be 100/5 = 20%
your annual return is 20%

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Wrong. If you received an annual return of 20% then after 5 years you would have 1.2^5 = 2.49 times your starting amount.

Please note that this post is over 3 years old - no need to discuss it now.