Which term refers to the monetary gain or loss of an investment over time?

• A. Diversification
• B. Principal
• C. Liquidity
• D. Return

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'Return': In financial accounting, 'Return' refers to the monetary gain or loss generated by an investment over a specific period of time. It is a key measure used to evaluate the performance of an investment.
2. Differentiate 'Return' from other terms: Diversification refers to spreading investments across various assets to reduce risk. Principal is the original amount invested or loaned. Liquidity refers to how quickly an asset can be converted into cash without affecting its market price.
3. Recognize that 'Return' is the correct term for monetary gain or loss: It directly measures the financial outcome of an investment, including both income (e.g., dividends, interest) and capital gains or losses.
4. Understand how 'Return' is calculated: The formula for return is typically expressed as: $\frac{(\mathrm{Ending Value}-\mathrm{Beginning Value})+\mathrm{Income}}{\mathrm{Beginning Value}}$. This formula accounts for changes in value and any income generated during the investment period.
5. Apply the concept of 'Return' in decision-making: Investors use return to assess the profitability of investments and compare different opportunities. A higher return generally indicates better performance, but it should also be evaluated in the context of risk.