Total return index
In finance , the total return index is an index that measures the performance of a group of components by assuming that all cash distributions are reinvested and additionally tracks the price movements of the components. While it is common to refer to the stock index , there are also total return indices for bonds and commodities .
General
A total return index (TRI) is different from a price index . A price index only takes into account price movements (capital gains or losses) of the securities that make up the index, while a total return index includes dividends , interest, rights offers and other distributions realized over a period of time. Looking at the total return on an index is usually viewed as a more accurate measure of performance.
Many stock indices are calculated as both a price index and a total return index: the US stock index S&P 500 is an example of a price index and the German stock index DAX is an example of a total return index.
The TRI is also used to develop a portfolio as a weighted combination of assets as described in modern portfolio theory . Although this theory works on historical data, the models that follow this theory attempt to calculate expected return based on a selected combination of assets . In this way, for example, a stock portfolio that is part of a stock index can be compared with the performance version of the stock index.