Total return index

A total return index is an index that measures the performance of a group of components by assuming that all cash distributions are reinvested, in addition to tracking the components' price movements.[1] While it is common to refer to equity based indices, there are also total return indices for bonds and commodities.[2]

A total return index (TRI) is different from a price index. A price index only considers price movements (capital gains or losses) of the securities that make up the index, while a total return index includes dividends, interest, rights offerings and other distributions realized over a given period of time. Looking at an index's total return is usually considered a more accurate measure of performance.[1]

Many stock indexes are calculated as a price index and a total return index as well: The US stock index S&P 500[3] is an example of a price index and the German stock market index DAX[4] is an example of a total return index

The TRI is also used to develop a portfolio as a weighted combination of assets, as it is described in modern portfolio theory. Though this theory is working with historical data, the models following this theory are trying to calculate the expected return based on a selected combination of assets. For example, in this way a stock portfolio representing a part of a stock index can be compared with the performance version of the stock index.

References

  1. 1 2 What is total return index? definition and meaning InvestorWords.com. Retrieved November 21, 2011.
  2. ↑ Total Return Index Definition Investopedia. Retrieved November 21, 2011.
  3. ↑ S&P | S&P 500 | Americas standardandpoors.com. Retrieved November 21, 2011.
  4. ↑ DAX: Stock Index Summary Bloomberg. Retrieved November 21, 2011.
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