Steps to Calculate Total Return Indices
If you are fond of undertaking diverse investment then you need to pay more attention towards the Total Return Indices. Dividend Index is one important parameter in the same. Besides, knowing the Smart Beta, you need to know what you take home with each investment. Three important parameters are the total return of an index, the total dividends paid as well as that reinvested. Here we will know the steps to calculate Total Return Indices. The total return index actually reflects the entire benefit of holding the constituent of an index in a given time. This implies reinvesting the dividends into the index by simply adding them, each period to the changes in price of index portfolio.
Adding dividends expressed in points
Here you need to know a common denominator. You simply need to divide the dividends paid over the period by the same divisor that you have used in order to calculate the index. This provides you with the dividends paid out per index point. Use the following equation. This equation consists of two parameters that are really important in calculating the same.
With this you have completed the initial step and now you can head towards the next step that is easy to approach. Now adjust the price return index value of the day by making use of the below given formula. It is the common point of the dividends as well as the index price change
.
Now apply this adjustment to total return index series. This will provide you the entire dividend payments. You now have to multiply it with previous day’s total return index level.
All in all, this is the basic insight into calculating the total return index. Having a thorough knowledge of the same will provide you a great help in the times to come. The Total Return is very powerful and should not be underestimated. You should never confuse the Price return indices” with the “price-weighted indices.” The two are very different. Also, you need to know that the components are given weights depending on the level of their individual price.
Source : https://sites.google.com/site/thematicindex/steps-to-calculate-total-return-indices
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