The price return is the rate of return 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 borrower 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 disti ...
and
dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-inv ...
s, is ignored. This contrasts with the
total return, 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 that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance.
Two of the ...
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 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
and the
MSCI EAFE, 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]
See also
*
Investment performance Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency.
Investors o ...
*
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, such as interest payments, coupons ...
*
Returns (economics)
Returns, in economics and political economy, are the distributions or payments awarded to the various suppliers of a good or service
Wages
Wages are the return to labor—the return to an individual's involvement (mental or physical) in the creati ...
*
Interest
In finance and economics, interest is payment from a borrower 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 disti ...
*
Dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-inv ...
*
Total return
References
Investment
{{investment-stub