Price return
Encyclopedia
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
and dividend
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 is quoted in the press, the quoted returns concern price returns, rather than the total returns. Examples are the S&P 500
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.
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s, is ignored. This contrasts with the total return
Total return
The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees...
, which does take into account the income generated in the portfolio.
Often, when the return of a stock market index is quoted in the press, the quoted returns concern price returns, rather than the total returns. Examples are the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
and the MSCI EAFE
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...
, 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.