Limited Time Offer: Save 10% on all 2022 Premium Study Packages with promo code: BLOG10

Individuals Partnerships Tutoring Pricing

CFA® Exam FRM® Exam Actuarial Exams MBA Admission Try Free Trial

EQUIT Y

Price Return and Total Return of an Index

12 Sep 2019

Shop CFA® Exam Prep

Security Market Indices (2022 Level I CFA® Exam – Rea… Offered by AnalystPrep
Share

Level I
Watch on
Level II

Index Value Level III

The formula for calculating the value of a price return index is as follow:
All Three Levels

∑N nP
i=1 i i
VP RI =
D Featured

Monetary and Nonmonetary Bene?ts

Affecting the Value and Price of a
Where:
Forward Contract
VPRI = the value of the price return index
Concepts of Arbitrage, Replication and
ni = the number of units of constituent security held in the index portfolio Risk Neutrality

N = the number of constituent securities in the index European versus American Options

Pi = the unit price of constituent security View More

Di = the value of the divisor

While the formula for calculating the value of an index may seem somewhat Shop FRM® Exam Prep
complicated at ]rst glance, it is similar to calculating the value of any other
normal portfolio of securities as it involves adding up the values of constituent
securities. Index value calculation has just one additional step of dividing the
sum of constituent securities’ values by a divisor, which is usually chosen at the
inception of the index to set a convenient beginning value and then adjusted to
offset index value changes unrelated to changes in the prices of constituent
securities.

Example 1: Index Value

An index is made up of two constituent securities, Stock A and Stock B. What FRM Part I
beginning divisor must be used to achieve a beginning value of 1,000?

FRM Part II
Security Units Price/Unit
Stock A 50 10 FRM Part I & Part II
Stock B 30 100

Learn With Us
Let’s ]rst calculate the sum of the values of both constituent securities.
Subscribe to our newsletter and keep up
Stock A value = 50 × 10 = 500 with the latest and greatest tips for
success
Stock B value = 30 × 100 = 3,000
Email Address Subscribe
Stock A value + Stock B value = 3,500

The divisor must be set such that this ]gure is adjusted down to 1,000.

Shop Actuarial Exams Prep

3, 500
1, 000 =
D

3, 500
D=
1, 000

D = 3.5
Exam P (Probability)

Price Return and Total Return Exam FM (Financial

Mathematics)
The price return calculation – the return from the index in percentage terms – is
simply the difference in value between the two periods divided by the beginning
value. Exams P & FM

VP RI1 – VP RI0
P RI = Shop GMAT® Exam Prep
VP RI0

The formula for total return is the same, except we need to add the income
generated from the securities, usually in the form of dividends:

VP RI1 – VP RI0 + IncomeI

P RI =
VP RI0

Complete Course
PRI = the price return of the index portfolio

VPRI1 = the value of the price return index at the end of the period

VPRI0 = the value of the price return index at the beginning of the period

TRI = the total return of the index portfolio

IncomeI = the total income from all securities in the index over the period

Another way to calculate these returns would be to sum up the weighted returns
of each constituent security in the index portfolio.

R I = w1 R 1 + w2 R 2 + … + wN R N

RI = the return of the index portfolio number (as a decimal number)

Ri = the return of constituent security i (as a decimal number)

wi = the weight of security i (the fraction of the index portfolio allocated to

security

Note that this formula works for both price and total return calculations.

Example 2: Price Return and Total Return

Calculate the one-year price return and total return for the Uncommon & Riches
5, a ]ctional index made up of ]ve constituent securities. The divisor’s value
begins and ends the year at 1.

Constituent Security Units (billions) Beginning Value Dividend

Orange 5 107 2.15
Macrotough 7.75 55 1.20
Enout Stationary Corp 4 75 2.70
Draintree 0.5 660 0.00
Smith & Smith 2.75 100 3.00

Let’s ]rst calculate the beginning index price by multiplying the number of units
and price of each constituent security and totaling the values.

VPRI0 = (5 × 107) + (7.75 × 55) + (4 × 75) + (5 × 660) + (2.75 × 100)

VPRI0 = 535 + 426.25 + 300 + 330 + 275 = 1,866.25

We’ll do the same calculation again, except replace the beginning values with
ending values.

VPRI1 = (5 × 116) + (7.75 × 62) + (4 × 91) + (5 × 750) + (2.75 × 115)

VPRI1 = 580 + 480 + 364 + 375 + 316.25 = 2,115.75

And one more time to calculate portfolio income.

IncomeI = (5 × 2.15) + (7.75 × 1.20) + (4 × 2.70) + (5 × 0) + (2.75 × 3)

IncomeI = 10.75 + 9.30 + 10.80 + 8.25 = 39.10

The one-year price return for the Uncommon & Riches 5 comes out to: (2,115.75
– 1,866.25)/1,866.25 = 13.37%

To calculate the total return, we’ll add in the portfolio income: (2,115.75 + 39.10
– 1,866.25)/1,866.25 = 15.46%
M
os
tP
op
u
la
r

Practice Package Learn + Practice Package Unlimited Package

For level I of the CFA® Exam For level I of the CFA® Exam For all three levels of the CFA® Exam
by AnalystPrep by AnalystPrep by AnalystPrep

Video Lessons Video Lessons for All Three Levels

Study Notes Study Notes for All Three Levels

Question Bank Question Bank Question Banks for All Three Levels

Printable Mock Exams Printable Mock Exams Mock Exams for All Three Levels

Performance Tracking Tools Performance Tracking Tools Performance Tracking Tools for all three
Levels of the CFA Exam

Formula Sheet Essential Review Summaries & Essential Review Summaries & Formula
Formula Sheet Sheet

5 Ask-a-tutor Questions 5 Ask-a-tutor Questions Unlimited Ask-a-tutor Questions for all

three Levels of the CFA Exam

$ 249 $ 399 $ 699

for a 12-month access for a 12-month access for lifetime access

Buy Now Buy Now Buy Now

Sergio Torrico diana Kriti Dhawan

2021-07-23 2021-07-17 2021-07-16

Excelente para el FRM 2
Escribo esta revisión en español para los
hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi
preparación para el FRM nivel 2 (lo tomé una
So helpful. I have been using the videos to
prepare for the CFA Level II exam. The videos
signpost the reading contents, explain the
concepts and provide additional context for
speciTc concepts.
A great curriculum provider. James sir explains
the concept so well that rather than
memorising it, you tend to intuitively
understand and absorb them.
Thank you ! Grateful I saw this at the right

Trustpilot rating score: 4.5 of 5, based on 69 reviews.

Previous Post Next Post

Compare, Calculate, and Interpret Yield Spread Measures Tools of Fiscal Policy

Related Posts
EQUIT Y EQUIT Y EQUIT Y EQUIT Y

JUN 15, 2019 SEP 12, 2019 JUN 15, 2019 JUN 15, 2019

Market Anomalies The Value and Return of Market Ef?ciency Role of Equity Securities
Market anomalies are an Index Market ef]ciency describes the Companies issue equity
exceptions to the notion of Every index weighting method extent to which available securities in the primary
market ef]ciency. They may has a formula that calculates information is quickly relected markets to raise capital and
be... Read More the weighting of a... Read in... Read More increase... Read More
More

AnalystPrep Study Tools Useful Links Languages

Home Study Plans FRM (GARP) Registration English

About Candidates’ Forum CFA Institute Registration Français

Contact Us Free Resources For The CFA SOA Exams Registration Español
Exam
We’re Hiring Trustpilot Reviews 中⽂
Free Resources For The FRM
Partnerships Crush Review
Exam
Tutoring Investopedia Review
Free Resources For Exam P
FAQ Best CFA Exam Prep Courses
Free Resources For Exam FM
Blog
Free Resources For Exam IFM

AnalystPrep © 2014-2021
All Rights Reserved
1751 Richardson Street, Privacy Policy Terms & Conditions
Montreal, QC H3K 1G5
support@analystprep.com

Disclaimer: “GARP® does not endorse, promote, review, or warrant the accuracy of the products or services offered by AnalystPrep of FRM®-related information, nor does it endorse any
pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to AnalystPrep, nor is GARP® responsible for any fees or costs of any person or
entity providing any services to AnalystPrep. FRM®, GARP®, and Global Association of Risk Professionals™ are trademarks owned by the Global Association of Risk Professionals, Inc.

CFA Institute does not endorse, promote or warrant the accuracy or quality of AnalystPrep. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Start studying for CFA® exams right away! Register For Free