Calculating total return (asked for on FINRA SIE, Series 6, 7, 65, 66)

Tyler York

You’ll need to calculate the total return of an investment strategy in order to pass the FINRA SIE and other exams, and in your work as an investment professional. This video walks you through a total return problem in Achievable’s FINRA test programs and shows you how to properly dissect related test questions.

If you’re looking for a comprehensive course to pass your FINRA or NASAA exam the first time, try Achievable’s FINRA and NASAA courses. We offer courses with industry leading pass rates for the FINRA SIE, Series 6, Series 7, Series 63, Series 65, and Series 66 exams. You can try some of our Series 7 sample questions to get a sense for our style.

Full Calculating total return (asked for on FINRA SIE, Series 6, 7, 65, 66) video transcript:

Let's take a look at a total return question together so that we can better understand. What Total return is. What components we used to do the calculation and how to consistently get these questions right on the exam. Alright, let's put the question on the board will read it together. An investor purchases $80,000 of an income fund one year ago. Over the following year, the fund paid a total of $1,600 in quarterly dividends and $4,000 in a one-time capital gains distribution needed the dividend or capital gain was reinvested as the investor elected to take the payment in cash today. Be over all funds position is worth $93,000. What is the total return of the front? Okay, this is our typical math face calculation. Type question where you might be sitting there wondering egg, you know, if they gave us a lot of numbers here, what's important? And what's not? We will certainly go through all of that. But the first thing we need to talk about

What exactly is Total return? Now I know these exams make a second guess things and in make us wonder if a term actually means what it sounds like the total return is. One of a few things. On the exam that actually is what it is. The total return is a measurement of the overall rate of return on an investment from the beginning of the investment to whatever Point time in the future were looking at, or until the end of that investment, the formula for total return is something that is probably a good thing to know for the exam. And also I think if you put things together and maybe think about what the term Total return mean, you might even get to the formula just by reasoning your way through it, the formula for total return is all gains and losses made on the investment /. The original cost of that investment. And by the way, we might call the original cost of the investment, the basis of the investment basis is just another way of

Referring to the amount of money. The investor has put into the investment and if we go back to the very first sentence of the question $80,000 is our original bassist in the question. Now, does that mean that we can automatically assume that $80,000 is going to be in the denominator? Is that just the true basis? It could be but if the investor reinvests or puts more money into the fund, at any point time in the future that will increase their bases, it increases the original investment into the security so we'll have to keep an eye out for that. Now, looking at the second, send it over the following year. The fun paid a total of $1,600 in quarterly dividend pause. Let's look at that part first. $1,600 in quarterly dividend is a form of return and that's something that we will need to account for the trick here is making sure that we know what time frame. We're looking at, if we go back to the very first sentence in the question, what kind of look

Exactly one year ago, and it looks like as we go forward in the question, what kind of fast-forwarding and talk him out today? So over one year, if we're getting $1,600 quarterly dividend, that means we're getting that four times during that year long process, $1,600 for X is $6,400 in total dividend and we need to keep track of that. One form of her, turn off of this font. If we look at the second half of the second tenant. There's also a $4,000 one-time capital gains distribution. This is a pretty common thing for something like a mutual fund to distribute capital gains on a once-per-year basis. And what that means is that the fund manager has sold some things in their portfolio at a game and they're passing through that game to the investors, most likely to take advantage of what we call subchapter M or the conduit rule. Even though that's not important for this question, that's kind of a a backdrop to what's going on funds can avoid

Taxation, if he distribute 90% of their net investment income to their shareholders in something that is a part of a fund's. Net investment income are realized capital gains. Again, things that they sold at a game at some point time during that year, capital gains distributions, typically happen once per year. Usually, at the end of the year, Sometime Late November or early December, that's typically when most mutual funds make these distributions now unlike the dividend which was paid quarterly, this was a one-time capital gains distribution, so we will just need to keep track of hay. This investor received an additional $4,000 of return and we will keep track of that alongside the dividends. We receive during the year. Now, going on to the third Senate, neither the dividend or capital gain was reinvested as the investor elected, to take B payments and cash, that just means they receive the dividends in the capital gains and decided to just maybe put it into a bank account. Maybe they took it and spend it on going on a vacation.

Something the big Point here is that they did not put the money back into the fun to buy more shares. Now, in terms of how that affects the calculation, we really don't do anything with those numbers. Anything additional, if the investor had reinvested that money back into the fund, that would have added to the basis. So we would would have added on top of the 80,000, the additional money, we put back into the fun but of course, they didn't really fast. So we don't have to worry about that in this question. And with that being said, we can basically go back and say, hey, $80,000 is just our bases so we can assume that's going to be in the denominator of the total return calculation, okay? Going to the second to last sentence today. The overall fun is worth $93,000 and of course, the next sentence of just asking is for the total return. Overall, what happened here? This is Nestor put $80,000 into the fund, received a couple distributions of dividends and capital gains totaling $6,400 + $4,000

They basically receive $10,400 out of the fund and also be have some unrealized capital gains themselves. They bought the fun for 80,000 and now it's worth $93,000. And that's the last thing we need to account for, in terms of gains or losses. Bought the fun at 80,000. It's dalworth 93,000, that is $13,000 of an unrealized capital gain that the investor has in total return wolf actor in even unrealized gains into the calculation. Now that we've looked at all parts of this question, we really have everything we need the investor receives $6,400 in dividends a one-time, $4,000, capital, gains distribution and they have a $13,000 on Realize capital gain on their current position. The dividends the one-time capital gains distribution in the unrealized gain on the fund all added together to give us $23,400 in total, gains and losses. And now we can do the total return calculation.

$3,400 in total gains and losses on the fund, / are $80,000 and nishel investment into the fund, that'll give us a 29.25% total return to summarize this. All total return is simply every dollar that was made or lost on the investment divided by the original investment. Sometimes, it looks like the investor who makes a decent amount of money. And certainly, making a 29.25% return. One year is actually a really great return, but keep in mind, investors lose money on Securities, and it's possible that the total return could even be negative. Bottom-line, those are the two things. You need every dollar made, or lost on the investment /, the basis, or the original cost of that investment.
Achievable SIE - $99
Achievable's SIE course includes our easy-to-understand online textbook, 2,000+ review questions, and 35+ full-length practice exams.
View SIE prep course
Desktop and mobile screenshots of Achievable SIE
All rights reserved ©2016 - 2023 Achievable, Inc.