Misplaced Pages

Price return

Article snapshot taken from Wikipedia with creative commons attribution-sharealike license. Give it a read and then ask your questions in the chat. We can research this topic together.
Rate of return on an investment portfolio
This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.
Find sources: "Price return" – news · newspapers · books · scholar · JSTOR (December 2022) (Learn how and when to remove this message)

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 dividends, 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. For example, mutual fund investors chase the price return, and forgo valuable investment opportunities.

See also

References

  1. "Reconsidering Returns", Samuel M Hartzmark and David H Solomon, 2022, Review of Financial Studies, Volume 35, Pages 343–393. https://academic.oup.com/rfs/article-abstract/35/1/343/6127187?redirectedFrom=fulltext
  2. "Too Naïve to NAV? Performance Display and Capital Misallocation", Haibei Zhao and Honglin Ren, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4281845


This article about investment is a stub. You can help Misplaced Pages by expanding it.

Categories: