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Total Return
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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
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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.
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.
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
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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%.
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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:
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%
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%).
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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.
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):
Annual-return statistics are commonly quoted in promotional materials for mutual funds, ETFs and
other individual securities.
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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.
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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.
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.
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.
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Mean Return
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2. In capital budgeting,
budgeting, it is the mean value of the probability distribution of possible returns.
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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.
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.
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:
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return figure is annualized. This helpsTopics
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