Technical / Deal Mechanics
Returns
Master returns calculations for finance interviews. Learn holding period, annualized, and total returns with clear formulas.
"Return of capital is more important than return on capital." — Will Rogers
Concept
A return measures the gain or loss on an investment relative to its cost. It answers the fundamental question: "How much did I make (or lose)?" Returns can be expressed in dollar terms (absolute) or percentage terms (relative), over any time horizon. The percentage form allows comparison across investments of different sizes.
Intuition
Returns exist because investors need a common language to evaluate performance. You can't compare a $1 million profit on a $10 million investment to a $100,000 profit on a $500,000 investment without converting to percentages.
The percentage form solves the scale problem—10% is 10% whether you invested $1,000 or $1 billion.
Annualization solves the time problem—you can't compare a 3-month return to a 5-year return without standardizing.
Total return solves the —ignoring dividends makes income-generating assets look worse than they are.
Components
Holding Period Return (HPR)
What It Is
The total return earned over a specific time period, regardless of how long that period is. Also called the simple return or cumulative return.
How to Calculate It
Interview Script
Returns measure the gain or loss on an investment relative to the amount invested, expressed either in dollar terms or as a percentage. The percentage form is critical because it solves the scale problem—allowing you to compare a $100,000 profit on a $500,000 investment to a $1 million profit on a $10 million investment. We also annualize returns to solve the time problem, since you can't meaningfully compare a 3-month return to a 5-year return without standardizing.