Major Return Measures

Updated for the 2026-2027 CFA® Level I curriculum.

An investment can have several valid return figures, depending on what the calculation includes. One measure may include income, another may deduct fees or taxes, and another may adjust the result for inflation or borrowing.

For CFA Level I, pay close attention to the inputs behind the reported return. Once you know which cash flows and adjustments belong in the calculation, choosing and interpreting the appropriate measure becomes much easier.

Key Takeaways

• Holding-period return combines the change in investment value with income received during the period.

• Gross and net returns measure performance before and after the applicable investment management fees.

• Pretax and after-tax returns show how taxation changes the amount retained by an investor.

• Nominal return measures growth in money terms, while real return measures growth in purchasing power.

• Leveraged return measures the gain or loss on the investor’s contributed equity after borrowing costs.

• The appropriate measure depends on the purpose of the analysis and the adjustments stated in the question.

What You Need to Know for CFA Level I

For CFA Level I, focus on:

• Calculating holding-period return from the beginning value, ending value, and investment income.

• Identifying whether fees have been deducted from a reported return.

• Distinguishing returns measured before and after taxes.

• Converting a nominal return into an exact real return.

• Calculating the return earned on investor equity when borrowing is used.

• Recognizing that a holding-period return is annual only when the holding period is one year.

• Keeping one-period return measures separate from arithmetic and geometric averages across several periods.

What Is Holding-Period Return?

Holding-period return, or HPR, measures the total gain or loss earned over the period an investment is held. It includes both the change in the investment’s value and any income received, such as dividends, interest, or distributions.

Where:

• Inline equation code = holding-period return

• Inline equation code = beginning investment value

• Inline equation code = ending investment value

• Inline equation code = income received during the holding period

You can also separate holding-period return into its price and income components.

The first part is the price return. The second part is the income yield. Adding them gives the investor’s total return for the period.

A calculation based only on the price change leaves out part of the return whenever the investment pays dividends, interest, or another distribution.

How Do the Major Measures of Return Differ?

A useful way to approach these questions is to look for words that signal the required adjustment. References to purchasing power point toward real return. References to management expenses point toward net return. References to borrowed money or margin point toward leveraged return.

What Is the Difference Between Gross and Net Return?

Gross return measures investment performance before the management fees specified in the calculation. Net return deducts those fees and gives a closer view of the return retained after investment management costs.

For a basic CFA question, the net return may be approximated by subtracting the management fee from the gross return.

Where:

• Inline equation code = return after the applicable management fee

• Inline equation code = return before the applicable management fee

• Inline equation code = management fee for the period

Suppose a portfolio earns a gross return of 9% and charges a 1% management fee.

This subtraction is a simplified approximation. The exact result may depend on when the fee is charged and which asset value is used to calculate it. Follow the fee treatment given in the question.

What Is the Difference Between Pretax and After-Tax Return?

Pretax return measures investment performance before taxes. After-tax return measures the portion retained after the applicable tax has been paid.

When the full return is taxed at one stated rate, you can calculate the after-tax return as follows:

Where:

• Inline equation code = return retained after tax

• Inline equation code = return earned before tax

• Inline equation code = applicable tax rate

Suppose an investment earns an 8% pretax return and the full return is taxed at 25%.

The investor retains a 6% return after tax.

Some questions assign different tax rates to interest, dividends, and capital gains. In that case, calculate the tax effect on each return component separately before adding the after-tax amounts.

How Do You Calculate Real Return?

Real return measures the change in an investor’s purchasing power after accounting for inflation.

The exact relationship between nominal return, inflation, and real return is:

Rearranging the formula gives:

Where:

• Inline equation code = return after adjusting for inflation

• Inline equation code = return stated in money terms

• Inline equation code = inflation rate during the period

Subtracting inflation from nominal return gives a useful approximation when both rates are relatively low.

Use the exact real return formula when the question asks for a calculated result or when the rates are large enough for the approximation to create a noticeable difference.

Real Return Example

An investment earns a nominal return of 8%, while inflation during the period is 3%.

The investor’s wealth increased by 8% in money terms. After accounting for higher prices, purchasing power increased by approximately 4.85%.

The subtraction shortcut would give 5%. That estimate is close, but the exact formula produces the more accurate 4.85% result.

How Does Leverage Affect Return?

Leverage allows an investor to control a larger investment by combining personal equity with borrowed funds. The resulting leveraged return measures the gain or loss relative to the investor’s own contributed capital.

For a one-period investment with no intermediate cash flows:

Where:

• Inline equation code = leveraged return on investor equity

• Inline equation code = ending value of the investment

• Inline equation code = amount borrowed at the beginning of the period

• Inline equation code = borrowing rate for the period

• Inline equation code = investor’s initial equity contribution

The expression represented by inline equation code is the principal and interest that must be repaid to the lender.

Leverage raises the return on equity when the investment earns more than the financing cost. It also makes the investor’s equity more sensitive to losses because the debt repayment remains due when the investment declines in value.

Leveraged Return Example

An investor purchases a $10,000 asset using $6,000 of personal equity and $4,000 borrowed at 5%. The asset is worth $11,000 at the end of the period.

First, calculate the amount owed to the lender.

The investor’s ending equity is the asset value after repaying the lender.

The leveraged return is:

The asset gained 10%, while the investor earned 13.33% on the contributed equity. The asset return exceeded the borrowing cost, so leverage increased the equity return.

A decline in the asset’s value would create the same magnifying effect in the opposite direction.

Worked Example: Holding-Period Return

An investor buys a share for $50. One year later, the share is worth $54, and the investor has received a $1.50 dividend.

Step 1: Calculate the Price Change

Step 2: Add the Dividend Income

Step 3: Divide by the Beginning Value

The investor earned an 11.0% holding-period return.

The price increase contributed 8.0%.

The dividend contributed another 3.0%.

Together, the two components equal the total holding-period return.

Common Exam Traps

Common mistakes include:

• Calculating only the price change and leaving out dividends, interest, or distributions.

• Treating a holding-period return as an annualized return when the investment was held for more or less than one year.

• Assuming gross and net returns include the same fees without checking the wording.

• Applying one tax rate to every return component when separate tax rates are provided.

• Using nominal return to describe purchasing-power growth without adjusting for inflation.

• Subtracting inflation when the question requires the exact real return formula.

• Assuming leverage improves every investment outcome.

• Forgetting to include interest when calculating the amount owed on borrowed funds.

• Calculating an arithmetic or geometric average when the question asks for a one-period holding return.

Practice Question

An investment begins the year at $80, ends the year at $84, and pays a $2 distribution during the year. The investment’s holding-period return is closest to:

1. 5.0%

2. 7.5%

3. 2.5%

FAQs About Major Return Measures