The price return is the

rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment over a specified time period, such as i ...

on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, while the income generated by the assets in the portfolio, in the form of

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

and

dividend A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

s, is ignored. This contrasts with the

total return The total return on a portfolio of investments takes into account both the capital appreciation on the portfolio, and the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This co ...

, which does take into account the income generated in the portfolio. Often, when the return of a

stock market index In finance, a stock index, or stock market index, is an Index (economics), index that measures the performance of a stock market, or of a subset of a stock market. It helps investors compare current stock price levels with past prices to calcul ...

is quoted in the press, the quoted returns concern price returns, rather than the total returns. Examples are the

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...

and the

MSCI EAFE The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acro ...

, which are typically quoted in terms of price return. This is clearly misleading, since, economically speaking, it is the total return that is the only thing that matters. Whether that return is generated in the form of cash income or in capital appreciation is irrelevant as long as one can always liquidate the investment to realise the capital appreciation into cash. For the same reason, it is inappropriate to evaluate the skill of a portfolio manager by comparing the total return on the portfolio to the price return of an index. After all, the total return on the index will always exceed the price return on the same index, so the portfolio manager could simply outperform the price return of the index by investing in the index. Even so, the use of price indices is still quite common in the investment industry. For example, mutual fund investors chase the price return, and forgo valuable investment opportunities."Too Naïve to NAV? Performance Display and Capital Misallocation", Haibei Zhao and Honglin Ren, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4281845

References

Investment {{investment-stub

See also

References