What does "return on investment" (ROI) measure?

Return on investment (ROI) measures the gain or loss made on an investment relative to the amount of money invested. It is a financial metric commonly used to evaluate the efficiency of an investment or to compare the profitability of different investments. By calculating ROI, investors can understand how much profit or loss was generated from their initial investment, expressed as a percentage. This helps in assessing the effectiveness of an investment strategy and determining which investments yield the best returns.

In contrast, the total assets held by an investor focus on the overall wealth contained in various forms, but does not consider the profitability of specific investments. The overall market value of all investments merely reflects the current market estate, indicating how much those investments would be worth as a whole but does not provide insight into how well individual investments have performed. Finally, the risk level associated with a particular asset pertains to the uncertainty of returns but does not quantify the gains or losses resulting from an investment. Hence, ROI provides a clear picture of investment performance, making it a crucial tool for investors.