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Total Return Index

D

dgw201

Member
Hello

I'm slightly confused about the assumption of reinvestment of dividends back into the index for TRI.

The 1st formula given by Acted: TR = I(t) - I(t-1) + XD(t) - XD(t-1)/ I(t-1)
Does not seem to include this assumption, as we're effectively just adding two returns together.

The second formula given in the core reading does seem to include the assumption: TRI(t) = TRI(t-1) * I(t)/(I(t-1) - [XD(t) - XD(t-1)])

So my point is - should we only be using the second formula given in the core reading if we state this assumption?

Thanks
 
Formulae for returns

Hi, The most likely formula to use in ST5 will be the first version. The one with the (XD2 - XD1) on the top line. This would be used to calculate the total return over a week, or a month, or a year. However if you are making a total return index, which requires reinvesting income back into the index on a daily basis, you would use the second formula. Apparently its better in this one set of circumstances. I can only think of one question in ST5 where the second frmula has been used, but I can think of loads that use the first formula. Hope this help.
 
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