Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does total return measure in the context of a security?

1. Growth in market share only

2. Growth in share price minus dividends

3. Growth in share price plus dividends and capital gains distributions

4. Fixed income cash flows plus capital gains

The correct answer is: Growth in share price plus dividends and capital gains distributions

Total return in the context of a security evaluates the overall performance of an investment by incorporating both the price appreciation of the security and any income generated from it. Specifically, total return accounts for growth in share price as well as dividends received and any capital gains distributions. This comprehensive measure provides a clearer picture of an investor's actual earnings from a security over a specific period. Investors want to understand not just how much the price of their investment has increased but also how much they have gained through dividends, which represent a share of the company's profits. Focusing solely on growth in market share or only on price changes without considering the dividends would ignore substantial income that investors earn. The correct measure of total return captures all aspects of an investment's profitability, making it the most accurate representation of an investment’s performance.