Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

Question

BlackTom AI · Accepted Answer

The statement describes that each stock's return in a year equals its dividend yield plus its capital gains yield, and that a weighted average of these returns is computed using each stock’s total market value to indicate the market's return.
Option 1: True — This is correct. The total return of a stock is the sum of its dividend yield and its capital gains yield. When you take a weighted average of all stocks’ total returns, weighting by each stock’s market value (market capitalization), you obtain a market-wide measure that reflects the performance of the overall market (i.e., the return on the market). This is the standard approach used in finance to derive a value-weighted market return, as opposed to a simple unweighted average, because larger companies exert more influence on the market’s overall performance.
Option 2: False — This would be incorrect because the statement is not asserting an unweighted average or an alternative method; it explicitly states a weighted average by each stock’s total market value. The description matches the conventional, value-weighted calculation used to represent the market return. The only potential caveat is that in practice, some indices use free-float adjustments or other refinements, but the core idea of a market-return measure being a weighted average of individual total returns remains true.

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