Choosing Total Return or Price Indices for Portfolio Risk and Construction

Summary

The document frames a choice between total return indices, which account for dividends, and price indices, which track price changes. It asks which index is appropriate for portfolio construction and risk management, and proposes that long-term investors benchmarked against a broad market may want total return data because they receive dividends. It suggests price indices may suit short-term investors.

These are presented as initial hypotheses rather than established recommendations. The text notes that the practical difference may depend on the investment universe and points to Swiss and Japanese equity indices as examples to examine, but supplies no comparison, data, or results. It leaves open how investment horizon, dividend treatment, benchmark conventions, and the purpose of the analysis should affect index selection.

Key ideas

• Total return indices include dividends, while price indices reflect price movements.
• The document proposes total return indices as a possible fit for long-term investors who receive dividends.
• It suggests price indices may be relevant to short-term investors.
• The impact of index choice may vary across investment universes, but no supporting comparison is provided.

Tags

# Portfolio and Risk Management: Total Return Index vs Price Index


# Portfolio and Risk Management: Total Return Index vs Price Index












For portfolio construction and risk management purposes, when one should use Total Return based Index instead of Price Index?

I am looking for pros and cons of using either Total Return and/or Price Indexes in a given situation. My initial thought is that if you are a long term investor and being benchmarked against a broad market index, then the portfolio construction and risk management should be based on Total Return Index as you will be collecting dividends while holding the Index. However, if you are a short term investor, then you would probably be looking at Price based Index.

One might perhaps point out that these differences are insignificant. But I guess it depends on many factors, including ones portfolio/investment universe. For example, by looking at Swiss and Japanese equity market indexes, we can observe the following:

I would appreciate all the comments and resources. Thank you.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.