Question

Define the following terms with Examples

(a) Total rate of return

(b) Capital gain

(c) Dividend yield

(d) Relative return

(e) Absolute return

(f) Nominal rate of return

(g) Real rate of return

Answer 1

(A) TOTAL RATE OF RETURN

It refers to the actual rate of interest on an investment or a group of investments for a particular period. This total return includes capital gain, dividend and distribution given over a period.

Example. Suppose you invest in 100 common stocks at a price of $20. Therefor the intial investment on the stock is $2000. The stock gives a 10% dividend and the investor reinvests buying 5 additional shares . Now after one year the stock price increases to $22. Now for the total rate of return the investor shall divide the total investment gains by the initial investment where total investment gain is 105 shares * $22 = $2310 - $2000( initial Investment) gain is $310 therefore total return = 310/2000*100 = 15.5%

(B) CAPITAL GAIN:

A capital gain is the appreciation in the value of the asset which rises the worth of the asset when compared to the initial investment on the asset.

Example: suppose you buy 100 common stock for $3 and after one year the stock price of the same common stock increases to $7 then the increase in the value $7-$3* 100common stock = $400 is the capital gain.

(C) DIVIDEND YIELD

It referes to the annual dividend payments made to common stock holders, which is expressed in percentage in relation to current stock price.

Annual dividend/stock price *100.

Example: Suppose the stock price of Google was $15 per share and the annual dividend was $2.50 then the dividend yield is

$2.50/$15*100 = 16.67%

(D) RELATIVE RETURN

It refers to the rate of return achieved by comparing a benchamark set up. This relative rate of return can be applied for m measuring performance, assets performance, overall company performance etc.

Example: suppose you hold a mutual fund which give 15% rate of interest and the benchmark index is 12%. The relative rate of return is 15% - 12% = 3%.