Total Return

A mutual fund's total return reflects:

1. A.Only dividendsDividends are one component and the easiest to see, since they arrive as cash. Restricting the measure to income would rate a fund that pays a large dividend while its share price sinks as a strong performer, which is exactly the distortion total return is designed to prevent.
2. B.Only the sales chargeThe sales charge is a cost of buying in, not a return at all. It affects what an individual investor nets from an investment but has nothing to do with what the portfolio itself earned over the period.
3. C.Only the change in NAVPrice change alone understates the result, and systematically so for income funds. NAV falls by the amount of each distribution, so a fund that pays out steadily can show a flat NAV while having delivered a solid return; the distributions have to be added back.
4. D.Dividends, capital gains distributions, and change in NAVCorrect - all three components.

Why: Total return combines dividends, capital gains distributions, and the change in NAV.

A fund's NAV rises from 20 to 22 and it pays 1 dollar in distributions. The total return is:

1. A.2%This reports the 2 dollar price change as though the number itself were the percentage. A 2 dollar move on a 20 dollar share is 10 percent before anything else is counted, so the answer is off by a factor of five even on the incomplete measure.
2. B.10%This captures the appreciation and drops the distribution. The word total is the instruction to include both, and leaving out the payout systematically understates what an income-paying fund delivered.
3. C.15%Correct - 3 / 20.
4. D.5%This is the mirror error, counting only the 1 dollar distributed and ignoring that the shares are worth 2 dollars more than when they were bought. Both the cash received and the change in value belong in the numerator, over the beginning value of 20 dollars.

Why: Total return = (price change + distributions) / beginning value = (2 + 1) / 20 = 15%.

A stock bought at 50 and sold at 54, paying a 2 dollar dividend, has a total return of:

1. A.8%This is the price gain alone (4/50) and omits the dividend. Total return means every source of return, so the $2 dividend belongs in the numerator too.
2. B.6%This reads the $6 of total dollar gain as though it were already a percentage. Dividing that $6 by the $50 cost is what converts it into a rate of return.
3. C.12%Correct - 6 / 50.
4. D.4%This is the dividend yield alone (2/50), leaving out the $4 of appreciation. Both components must be combined before dividing by cost.

Why: Total return = (price change + dividend) / cost = (4 + 2) / 50 = 12%.

A stock's total return consists of:

1. A.Dividends onlyDividends alone omit the price change, which for most stocks is the larger component. Total return is defined as the sum of both sources.
2. B.Price change onlyPrice change alone ignores the cash the shareholder actually collected. A stock that finishes the year flat but paid a 4% dividend still delivered a positive total return.
3. C.The dividend yield aloneDividend yield is one component expressed as a percentage of price, not the whole. Adding appreciation to it is what produces total return.
4. D.Dividends plus capital appreciationCorrect - income plus price change.

Why: Total return equals dividends received plus capital appreciation (price change).