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Total Return
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What is 'Total Return'

Total return, when measuring performance, is the actual rate of return of an
investment or a pool of investments over a given evaluation period. Total
return includes interest, capital gains,
gains, dividends and distributions realized
over a given period of time.
Total return accounts for two categories of return: income including interest
paid by fixed-income investments, distributions or dividends and capital
appreciation,, representing the change in the market price of an asset.
appreciation
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BREAKING DOWN 'Total Return'
Total return is the amount of value an investor earns from a security over a
00:01 01:06
specific period, typically one year, when all distributions are reinvested.
Total return is expressed as a percentage of the amount invested. For
example, a total return of 20% means the security increased by 20% of its original value due to a
price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund).
Total return is a strong measure of an investments overall performance.
Example of Total Return

An investor buys 100 shares of Stock A at $20 per share for an initial value of $2,000. Stock A pays a
5% dividend the investor reinvests, buying five additional shares. After one year, the share price rises
to $22. To calculate the investment's total return, the investor divides the total investment gains
(105 shares x $22 per share = $2,310 current value - $2,000 initial value = $310 total gains) by the
initial value of the investment ($2,000) and multiplies by 100 to convert the answer to a percentage
($310/$2,000 x 100 = 15.5%). The investor's total return is 15.5%.
Importance of Total Return

Some of the best dividend stocks have small growth potential and produce small capital gains.
Basing an investments return on capital gains alone does not take into consideration price increases
or other methods of growing the stocks value. For example, an investor buys shares of Company B,
and the share price increases 24.5% in one year. The investor gains 24.5% from the price change
alone. Since Company B also paid a dividend during the year, adding in the stocks yield of 4.1% to
the price change, the combined return is 28.6%.
Total return determines an investments true growth over time. It is important to evaluate the big
picture and not just one return metric when determining an increase in value.
Total return is used when analyzing a companys historical performance. Calculating expected future
return puts reasonable expectations on an investors investments and helps plan for retirement or
other needs.
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Return
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Video Definition

A return is the gain or loss of a security in a particular period. The return consists of the income and
the capital gains relative on an investment, and it is usually quoted as a percentage. The general rule
is that the more risk you take, the greater the potential for higher returns and losses.
Return is also used as an abbreviation for income tax return see 1040 Form.
Form.
BREAKING DOWN 'Return'

While some investors will settle for principal protection, most investors are in search of return,
specifically alpha returns. Alpha returns are generated when an investment generates more money
than it costs. In general, there are three different types of return measures: return on investment,
investment,
return on equity and return on assets. Each one is essentially calculated the same way, but the
inputs have different labels.
Return on Investment
The most common return measure, also referred to as the return on investment, or ROI, is calculated
by dividing the cost of the investment by the difference between the cost of the investment and the
gain on the investment. It is the most generic way to calculate return and is the basic formula used
to calculate other return measures. For example, if an investor pays $100,000 for real estate and then
sells it for $110,000, the return is calculated by taking the difference between $100,000 and $110,000,
and then dividing that number by the cost of the investment, or $100,000. The calculation is $10,000
divided by $100,000, or 10%.
Return on Equity
Return on equity, or ROE, is another commonly used measure of return used by those analyzing
business performance. In this case, a companys net income is the gain or loss, and the cost is the
average of the companys equity. ROE is used by investors looking for a return on the company's
equity capital.
capital. If a company makes $10,000 in net income for the year, and the average equity capital
of the company over the same time period is $100,000, the return on equity is 10%.
Return on Assets
Yet another commonly used measure of return is the return on assets, or ROA. It is commonly used
as a measure of return by those analyzing financial stocks. In this case, net income is also the gain,
but the investment is the assets of the company. Net income divided by average total assets equals
ROA. For example, if net income for the year is $10,000, and total average assets for the company
over the same time period is equal to $100,000, the return on assets is $10,000 divided by $100,000,
or 10%.
Expected Return
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Expected return is the amount of profit or loss an investor anticipates on an investment that has
various known or expected rates of return.
return. It is calculated by multiplying potential outcomes by the
chances of them occurring, and summing these results. For example, if an investment has a 50%
chance of gaining 20% and a 50% change of losing 10%, the expected return is (50% x 20% + 50% x
-10%), or 5%.
BREAKING DOWN 'Expected Return'

Expected return is usually based on historical data and is not guaranteed. For the most part, the
expected return is a tool used to determine whether or not an investment has a positive or negative
average net outcome. In the example above, for instance, the 5% expected return may never be
realized in the future; it is merely an average of what may occur. In addition to expected return, wise
investors should also consider the probability of return in order to properly assess risk. After all, one
can find instances in which certain lotteries offer a positive expected return, despite the very low
probability of realizing that return.
Expected Return of a Portfolio
The expected return doesn't just apply to single investments. It can also be analyzed for a portfolio
containing many investments. If the expected return for each investment is known, the portfolio's
overall expected return is simply a weighted average of the expected returns of its components. For
example, assume the following portfolio of stocks:
Stock A: $500,000 invested and an expected return of 15%
Stock B: $200,000 invested and an expected return of 6%
Stock C: $300,000 invested and an expected return of 9%
With a total portfolio value of $1,000,000, the weight's of Stock A, B and C are 50%, 20% and 30%.
Thus, the expected return of the total portfolio is:
Expected return of portfolio = (50% x 15%) + (20% x 6%) + (30% x 9%) = 7.5% + 1.2% + 2.7% = 11.4%
Risk Must Also Be Analyzed

It is quite dangerous to make investment decisions based on expected returns alone. Investors
should always review the risk characteristics of investment opportunities before making any buying
decisions, to determine if the investments align with their portfolio goals. For example, assume two
hypothetical investments exist. Their annual performance results for the last five years are:
Investment A: 12%, 2%, 25%, -9%, 10%
Investment B: 7%, 6%, 9%, 12%, 6%
Both of these investments have expected returns of exactly 8%. But when analyzing the risk of each,
as defined by standard deviation, Investment A is approximately five times more risky than
Investment B (Investment A has a standard deviation of 12.6% and Investment B has a standard
deviation of 2.6%).
Annual Return
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Annual return is the return an investment provides over a period of time, expressed as a time-
weighted annual percentage. Sources of returns can include dividends, returns of capital and capital
appreciation.. The rate of annual return is measured against the initial amount of the investment and
appreciation
represents a geometric mean rather than a simple arithmetic mean.
mean.
BREAKING DOWN 'Annual Return'

The de facto method for comparing the performance of investments with liquidity
liquidity,, an annual return
can be calculated for various assets, which include stocks, bonds, funds, commodities and some
types of derivatives
derivatives.. This process is a preferred method, considered to be more accurate than a
simple return, as it includes adjustments for compounding interest. Different asset classes are
considered to have different strata of annual returns.
Annual Returns on Stocks

Also known as an annualized return, the annual return expresses the stocks increase in value over a
designated period of time. In order to calculate an annual return, information regarding the current
price of the stock and the price at which it was purchased are required. If any splits have occurred,
the purchase price needs to be adjusted accordingly. Once the prices are determined, the simple
return percentage is calculated first, with that figure ultimately being annualized.
Example Annual Return Calculation
Consider an investor that purchases a stock on Jan. 1, 2000, for $20. The investor then sells it on Jan.
1, 2005, for $35 a $15 profit. The investor also receives a total of $2 in dividends over the five-year
holding period.
period. In this example, the investor's total return over five years is $17, or (17/20) 85% of the
initial investment. The annual return required to achieve 85% over five years follows the formula for
the compound annual growth rate (CAGR):
(37/20) ^(1/5 (yr)) 1 = 13.1% annual return
Annual-return statistics are commonly quoted in promotional materials for mutual funds, ETFs and
other individual securities.
Annual Returns on a 401K
The calculation differs when determining the annual return of a 401K during a specified year. First,
the total return must be calculated. The starting value for the time period being examined is needed,
along with the final value. Before performing the calculations, any contributions to the account
during the time period in question must be subtracted from the final value.
Once the adjusted final value is determined, it is divided by the starting balance. Finally, subtract 1
from the result and multiply that amount by 100 to determine the percentage total return.
Dividend Adjusted Return

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When a stock's return is calculated using not only the stock's capital appreciation, but also all
dividends paid to shareholders. This adjustment provides investors with a more accurate evaluation
of the return received over a specified holding period.
BREAKING DOWN 'Dividend Adjusted Return'

BREAKING DOWN 'Dividend Adjusted Return'

This is a very useful return evaluation method because it provides a more accurate reflection of an
investor's return. Be aware of the tax implications of the dividends received - these dividends will
most likely be classified as taxable income for the investor.
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Target Return
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A target return is a pricing model that prices a business based on what an investor would want to
make from any capital invested in the company. Target return is calculated as the money invested in
a venture plus the profit that the investor wants to see in return, adjusted for the time value of
money.. As a return on investment method, target return pricing requires an investor to work
money
backwards to reach a current price.
price.
BREAKING DOWN 'Target Return'

One of the major difficulties in using this pricing method is that an investor must pick both a return
that can be reasonably attained, as well as a time period in which the target return can be reached.
Picking a high return and a short time period means that the venture has to be much more
profitable in the short-run than if the investor expected a lower return over the same period, or the
same return over a longer period.
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Capital Appreciation
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Capital appreciation is a rise in the value of an asset based on a rise in market price.
price. It occurs when
the asset invested commands a higher price in the market than an investor originally paid for the
asset. The capital appreciation portion of the investment includes all of the market value exceeding
the original investment or cost basis.
basis.
BREAKING DOWN 'Capital Appreciation'

Capital appreciation is one of the two main sources of investment returns, with the others being Search Investopedia Newsletters
dividend or interest income. The combination
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capital appreciation with dividend or interest
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returns is referred to as total return. Capital appreciation can occur for many different reasons in
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occur with financial assets such as stocks or with real
assets such as real estate.
Example of Capital Appreciation

An investor purchases a stock for $10 and the stock pays an annual dividend of $1, equating to a
dividend yield of 10%. A year later, the stock is trading at $15 per share and the investor has received
the dividend of $1. The investor has a return of $5 from capital appreciation as the price of the stock
went from the purchase price or cost basis of $10 to a current market value of $15; in percentage
terms, the stock price increase led to a return from capital appreciation of 50%. The dividend
income return is $1, equating to a return of 10% in line with the original dividend yield. The return
from capital appreciation combined with the return from the dividend leads to a total return on the
stock of $6 or 60%.
Causes of Capital Appreciation

The value of assets can increase for several reasons. There can be a general trend for asset values to
increase including macroeconomics factors such as strong GDP growth or Federal Reserve policy
such as lowering interest rates. On a more granular level, a stock price can increase because the
underlying company is growing faster than analysts expect, or the value of a house can increase
because of proximity to new developments such as schools or shopping centers.
Investing for Capital Appreciation

Capital appreciation is often a stated investment goal of many mutual funds. These funds look for
investments that will rise in value based on increased earnings or other fundamental metrics
metrics..
Investments targeted for capital appreciation tend to have more risk than assets chosen for capital
preservation or income generation, such as government bonds, municipal bonds or dividend-paying
stocks. Because of this, capital appreciation funds are considered most appropriate for risk-tolerant
investors. Growth funds are customarily characterized as capital appreciation funds as they invest in
the stocks of companies that are growing quickly and increasing their value. Capital appreciation is
employed as an investment strategy to satisfy the retirement and lifestyle goals of investors.
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Mean Return
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The mean return, in securities analysis, is the expected value,

value, or mean, of all the likely returns of
investments comprising a portfolio. It is also known as "expected return".
2. In capital budgeting,
budgeting, it is the mean value of the probability distribution of possible returns.
BREAKING DOWN 'Mean Return'

Mean returns attempt to quantify the relationship between the risk of a portfolio of securities and its
return. It assumes that while investors have different risk tolerances,
tolerances, rational investors will always
seek the maximum rate of return for every level of acceptable risk. It is the mean, or expected, return
that investors try to maximize at each level of risk.
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Total Return Index

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The total return index is a type of equity index that tracks both the capital gains of a group of stocks
over time, and assumes that any cash distributions
distributions,, such as dividends, are reinvested back into the
index. Looking at an index's total return displays a more accurate representation of the index's
performance. By assuming dividends are reinvested, you effectively account for stocks in an index
that do not issue dividends and instead, reinvest their earnings within the underlying company.
BREAKING DOWN 'Total Return Index'

A total return index may be deemed more accurate than other methods that do not account for the
activity associated with dividends or distributions, such as those that focus purely on the annual
yield. For example, an investment may show an annual yield of 4% along with an increase in share
price of 6%. While the yield is only a partial reflection of the growth experienced, the total return
includes both yields and the increased value of the shares to show a growth of 10%. If the same
index experienced a 4% loss instead of a 6% gain in share price, the total return would show as 0%.
The Standard & Poor's 500 Index (S&P 500) is one example of a total return index. The total return
indexes follow a similar pattern in which many mutual funds operate, where all resulting cash
payouts are automatically reinvested back into the fund itself. While most total return indexes refer
to equity-based indexes, there are total return indexes for bonds which assume that all coupon
payments and redemptions are reinvested through the buying more bonds in the index.
Other total return indexes include the Dow Jones Industrials Total Return Index (DJITR) and the
Russell 2000 Index.
Understanding Index Funds

Index funds are a reflection of the index they are based on. For example, an index fund associated
with the S&P 500 may have one of each of the securities included in the index, or may include
securities that are deemed to be a representative sample of the indexs performance as a whole.
The purpose of an index fund is to mirror the activity, or growth, of the index that functions as its
benchmark. In that regard, index funds only require passive management when adjustments need
to be made to help the index fund keep pace with its associated index. Due to the lower
management requirements, the fees associated with index funds may be lower than those that are
more actively managed. Additionally, an index fund may be seen as lower risk since it provides for an
innate level of diversification.
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Cumulative Return
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A cumulative return is the aggregate amount an investment has gained or lost over time,
independent of the period of time involved. Presented as a percentage, the cumulative return is the
raw mathematical return of the following calculation:
(Current Price of Security) - (Original Price of Security) / (Original Price of Security)
Investors are more likely to see a compound return than a cumulative return, as the compound Search Investopedia Newsletters
return figure is annualized. This helpsTopics
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BREAKING DOWN 'Cumulative Return' Advisor Insights


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1/28/2017 CumulativeReturn

What is 'Total Return'

Example of Total Return

Importance of Total Return

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BREAKING DOWN 'Return'

BREAKING DOWN 'Expected Return'

Expected Return of a Portfolio

Stock A: $500,000 invested and an expected return of 15%

Stock B: $200,000 invested and an expected return of 6%

Stock C: $300,000 invested and an expected return of 9%

Risk Must Also Be Analyzed

Investment A: 12%, 2%, 25%, -9%, 10%

Investment B: 7%, 6%, 9%, 12%, 6%

BREAKING DOWN 'Annual Return'

Annual Returns on Stocks

Example Annual Return Calculation

(37/20) ^(1/5 (yr)) 1 = 13.1% annual return

Annual Returns on a 401K

Dividend Adjusted Return

BREAKING DOWN 'Dividend Adjusted Return'

BREAKING DOWN 'Dividend Adjusted Return'

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BREAKING DOWN 'Target Return'

What Do Other Investors Know That You Don't?

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BREAKING DOWN 'Capital Appreciation'

Example of Capital Appreciation

Causes of Capital Appreciation

Investing for Capital Appreciation

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The mean return, in securities analysis, is the expected value,

BREAKING DOWN 'Mean Return'

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Total Return Index

BREAKING DOWN 'Total Return Index'

Understanding Index Funds

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(Current Price of Security) - (Original Price of Security) / (Original Price of Security)

BREAKING DOWN 'Cumulative Return' Advisor Insights

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