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How can we measure Total return- Measuring the Rate of Return
Total return can be defined as:
Total returns = (Cash payment received + Price change over the period) / Purchase price of the asset
Price change over the period, is the difference between beginning (and purchase) price and ending (or sales) price. This can be either positive (sales price exceeds purchase price) or negative (purchase price exceeds sales price).
General equation for calculating the rate of return for one year is demonstrated below:
K = [Dt+ (Pt - Pt-1)] / Pt-1
Where K = Rate of Return
Pt= Price of security at time "t" i.e. at the end of the holding period
Pt-1= Price of security at time "t-1" i.e. at the beginning of the holding period or purchase price.
DT= Income or cash flows receivable from the security at time "t".
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