Total Return

Total return measures the overall gain or loss on an investment over a specified period, accounting for all potential sources of returns, including price appreciation, dividends, and interest income.

Understanding Total Return

Total Return encompasses not just the change in an asset’s price but also any income generated from that investment. It provides a comprehensive view of an investor’s performance.

Components of Total Return

• Price Appreciation: The increase in the asset’s market value.
• Dividends: Payments made to shareholders from a company’s profits.
• Interest Income: Earnings from fixed-income investments like bonds.

Calculation of Total Return

The formula for calculating total return is:

Total Return = (Ending Value – Beginning Value + Income) / Beginning Value

Where:
– Ending Value is the current market value of the investment.
– Beginning Value is the initial investment amount.
– Income includes any dividends or interest received during the period.

Example of Total Return Calculation

Suppose an investor purchases shares of a company for $1,000 (Beginning Value). Over the year, the market value of the shares rises to $1,200 (Ending Value), and the investor receives $50 in dividends.

• Beginning Value: $1,000
• Ending Value: $1,200
• Income from dividends: $50

Using the formula for total return:

Total Return = ($1,200 – $1,000 + $50) / $1,000

Calculating it step by step:

1. Calculate the gain: $1,200 – $1,000 = $200
2. Add dividends: $200 + $50 = $250
3. Divide by the initial investment: $250 / $1,000 = 0.25

Thus, the total return is 0.25, or 25%.

In this example, the total return reflects not just the increase in the investment’s price but also acknowledges the income generated from dividends, providing a holistic view of the investment performance.