What's the application of ROI in real-world business? What's the application of ROI in the stock...

What's the application of ROI in real-world business?
What's the application of ROI in the stock valuation?

Expert Solution

· ROI stands for return on investment and the major application for the ROI in the real-world scenario, the investors uses this to compare different investment. Let’s say there are 3 investment with similar risk profile but one of them has the highest ROI so the investors will choose the investment with the highest ROI. Similarly, ROI is a measure used to compare different business prospect. ROI can also be sued to compare it against what the investor required rate of return is against the expected ROI.

· The ROI acts as a required rate in the stock valuation. Most investors have pre-determined expected rate of return based on their expectation or industry average, they expect that much return to achieve, this act as a required rate in the calculation of the price of the stock. Higher required rate means the price of the stock would be lower, the investor is valuing the stock lower. This can also be looked from the perspective of risk. High expected ROI means the risk is higher in the business and the investor is expecting to be compensated for that.

jeff jeffy answered 2 years ago

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