Total Return Index
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A total return index is an
index Index (: indexes or indices) may refer to: Arts, entertainment, and media Fictional entities * Index (''A Certain Magical Index''), a character in the light novel series ''A Certain Magical Index'' * The Index, an item on the Halo Array in the ...
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.What is total return index? definition and meaning
InvestorWords.com. Retrieved November 21, 2011.
While it is common to refer to equity based indices, there are also total return indices for bonds and
commodities In economics, a commodity is an economic good, usually a resource, that specifically has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Th ...
. A total return index (TRI) is different from a price return index. A price return 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. Typically, taxation is different between
capital gains Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. A ca ...
and
dividends 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 ...
, so that the total return index only forms a rough approximation of what a long term investor can expect to keep after taxation. Many stock indexes are calculated as a price return index and a total return index as well: The US stock index
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 ...
is an example of a price return index and the German stock market index DAXDAX: Stock Index Summary
Bloomberg. Retrieved November 21, 2011.
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 Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...
. 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

Stock market indices {{stockexchange-stub