A total return index is an

index Index (or its plural form 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 a Halo megastru ...

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 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. The price of a comm ...

. A total return index (TRI) is different from a price return index. A

price return 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 ...

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 ...

and

dividends 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-in ...

, 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 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...

is an example of a price return index and the German stock market index

DAX Dax or DAX may refer to: Business and organizations * DAX, stock market index of the top 40 German companies ** DAX 100, an expanded index of 100 stocks, superseded by the HDAX ** TecDAX, stock index of the top 30 German technology firms * Dax ...

DAX: 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