Market Return

Market return is the return earned by a market as a whole over a period. It is measured with a broad stock market index, and a full measure includes dividends as well as the change in the index level:

Here $P_0$ and $P_1$ are the index levels at the start and end of the period and $D$ is the dividends paid, in index points. If an index rises from 4,000 to 4,300 and pays dividends worth 60 points, the market return is $(300 + 60) / 4{,}000 = 9$ percent. Leaving out dividends gives the price return, 7.5 percent here, which understates the total return. The figure is the yardstick against which other returns are judged. In the capital asset pricing model, a share's expected return depends on its beta to the market return, and the excess of the market return over the risk-free rate is the market risk premium. A manager's alpha is the return left after the market's contribution is removed.