Question

Market convention is that comparative index returns should include total return adjustments; assuming all dividend payouts were reinvested in fractional new shares of the company at the price on the date of the dividend.

A. Should not include total return adjustments
B. Should include total return adjustments
C. May include total return adjustments
D. Typically include total return adjustments

Answer 1

Comparative index returns should typically include total return adjustments, implying that all dividends are reinvested, which has historically been a significant component of the total returns for indices like the S&P 500.

Step-by-step explanation:

The market convention for comparing index returns generally states that such returns should include total return adjustments. This means reinvesting all dividend payouts into fractional new shares of the company at the price on the date of the dividend. Based on historical data, as exemplified by the S&P 500 index, we can observe that dividends and capital gains are important factors contributing to total returns. From the 1950s to the 1980s, the dividend contribution to total returns was significantly higher, about 4%, as compared to the 1% to 2% seen after the 1990s. Understanding that capital gains have occasionally outpaced dividends, especially since the 1980s, is crucial in recognizing how total returns can significantly differ when incorporating dividend reinvestment versus considering only price appreciation.