NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client has an investment portfolio with an initial value of $100,000. Over the past year, the portfolio generated investment income of $3,000 and realized capital gains of $7,000. The portfolio also experienced unrealized capital gains of $5,000. At the end of the year, the portfolio's market value was $115,000. What is the client's total return for the year?
- A15.0%
- B12.0%
- C10.0%
- D8.0%
Show answer & explanationAnswer & explanation
Correct answer: A. 15.0%
Total return includes all income and both realized and unrealized capital gains (or losses). The change in market value already reflects all these components. Total Return = (Ending Value - Beginning Value + Income) / Beginning Value. In this case, (115,000 - 100,000) / 100,000 = 15,000 / 100,000 = 0.15 or 15%. Alternatively, the total return is the percentage change in the portfolio's market value from beginning to end.
Why the other options are wrong
- B. This is incorrect. It might arise from miscalculating or including only certain components.
- C. This represents the sum of income and realized gains as a percentage of the initial investment, ignoring unrealized gains which are included in the ending market value.
- D. This only considers realized gains and income ($3,000 + $7,000 = $10,000 / $100,000 = 10%), but incorrectly omits unrealized gains, or simply focuses on the sum of income and realized gains.
Total Return
A comprehensive measure of an investment's performance, including all income (dividends, interest) and capital appreciation (realized and unrealized gains/losses).
- Calculated as (Ending Value - Beginning Value + Income) / Beginning Value.
- Reflects the overall change in value of an investment over a period.
- Is a key metric for evaluating portfolio performance.
Memory trick: Total Return: End Value minus Start Value, all divided by Start Value.