This chapter discusses sources of return, how they are determined, the assumptions required to use the process, and the results one might expect from using the process. The concept of total return is defined and developed.

When you finish this chapter, you should understand the concept of total return, the assumptions you must make to compute it, how to compute it, and the situations where you might apply it.

Suppose you put aside some money into a fund and don t plan to take anything out of the fund for some time. You plan to reinvest any income the fund receives and liquidate the fund and take the proceeds at some future time. You may or may not add additional money to the fund before you liquidate it.

You can see that this situation resembles the examples we studied in earlier chapters on present values and the future value of an annuity. In the case of the future value of an annuity, we added fixed amounts to the fund, at fixed periodic intervals, and earned a fixed rate on the assets of the fund. In the case of present value, we set aside a fixed amount and earned at a fixed rate for a fixed period of time. In this chapter we generalize these concepts somewhat. Later in the book, we will generalize these further.