Total Return

When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

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Total return accounts for two categories of return: income and capital appreciation. Income includes interest paid by fixed-income investments, distributions or dividends. Capital appreciation represents the change in the market price of an asset.

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Annual return on an investment including interest on dividend payments and price appreciation (capital gains). Total return is usually expressed as a percentage. For corporate bonds, total return is the equivalent of the Yield to Maturity calculation; for stocks, future capital appreciation is projected using the current Price Earnings Ratio. Mutual funds use a formula worked out by the Securities and Exchange Commission in advertising fund performance.

In mortgage-backed securities and asset-backed securities, total return differs from the yield to maturity calculation because the total return calculation takes into account reinvestment income and borrower prepayments. When interest rates are falling, borrowers tend to prepay their mortgages and refinance their loans at current interest rates, causing investor yields on conventional mortgage-backed securities to drop. See also Cash Flow Yield.