While managing a program for the banking sector spanning multiple transformational areas. A new portfolio manager comes to you seeking advice on the usefulness of ROI. You tell her that ROI is the…

High-risk investments have uncertain and volatile returns that make a simple ROI calculation misleading, as the measure does not adequately account for the probability-weighted downside outcomes.

Long-duration, high-risk investments compound both the time-value distortion and outcome uncertainty, making ROI an especially poor metric - IRR or risk-adjusted NPV are far more appropriate.

ROI as a simple ratio of net benefit to cost is most accurate and meaningful when the investment period is short - minimizing the need for discounting future cash flows - and when risk is low, meaning the projected returns are reliable. In these conditions, ROI provides a clear and comparable measure of return without the distortions introduced by long time horizons or high uncertainty.

Long-duration investments require time-value-of-money adjustments that simple ROI ignores, causing it to overstate returns by treating future cash flows as equivalent to present ones.