The total return of an investment includes cash distributions (interest, dividends, rents) and the change in the value of the asset. For example, an investment of $100 that pays a dividend of $3 and then grows in value to $107 at the end of the year has a total return of 10%.
Gordon equation: Total return = Current dividend rate + Annual rate of dividend increase
Expresses total return only in terms of future cash distributions by assuming increased value will allow future distributions. For example, 3% current dividend rate + 7% expected rate of dividend increase = 10%. The effect is identical to adding dividend and value growth.
A group of investments in similar types of assets is known as a portfolio. The expected return on a portfolio is a weighted average of the expected return of the individual investments.
For example, if a portfolio is invested 60% in Asset A, which is expected to return 10%, and 40% in Asset B, which is expected to return 5%, the expected portfolio return is 8%, as follows:
60% × 10% + 40% × 5% = 6% + 2% = 8%
When measuring average returns, there are two different measures:
For example, ...