Measuring Returns (TOTAL RETURN)

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 Measuring Returns:

TOTAL RETURN

 We now know that a correct returns measure must incorporate the two components of return, yield and price change, keeping in mind that either component could be zero. The total return (TR) for a given holding period is a decimal or percentage number relating all the cash flows received by an investor during any designated time period to the purchase price of the asset calculated as

The periodic cash flows from a bond consists of the interest payments received, and for a stock, the dividends received. For some assets, such as a warrant or a stock that pays no dividends, there is only a price change. Part A of Exhibit 1 illustrates the calculation of TR for a bond, a common stock, and a warrant. Although one year is often used for convenience, the TR calculation can be applied to periods of any length.


Conclusions About Total Return:

 In summary, the total return concept is valuable as a measure of return because it is all-inclusive, measuring the total return per dollar of original investment. 3 Total Return (TR) is the basic measure of the return earned by investors on any financial asset for any specified period of time. It can be stated on a decimal or percentage basis. 

TR facilitates the comparison of asset returns over a specified period, whether the comparison is of different assets, such as stocks versus bonds, or different securities within the same type, such as several common stocks. Remember that using this concept does not mean that the securities have to be sold and the gains or losses actually realized—that is, the calculation applies to realized or unrealized gains



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