Portfolio Returns Explained
Learn How To Calculate Portfolio Returns
During a dinner party I attended last week, a friend and I began talking about our portfolio of investments. The focus naturally shifted to the equities bull market and we soon started talking about our yearly returns. What we quickly realised however, was that the numbers we were each quoting were not comparable. We were using different methodologies for calculating our returns.
In this article, we will go through some of the different ways that returns can be calculated and some of the pros and cons of each.
Summary
In summary, we will be covering the following calculations:
- Holding Period Returns
which in turn can be used to calculate:
- Mean Return
- Geometric Returns or Time Weighted Rate of Return (TWRR)
- Money Weighted Rate of Return (MWRR) or Internal Rate of Return (IRR)
- Modified Dietz
Holding Period Returns
When it comes to calculating the performance of a portfolio, one needs to compare the initial value of the portfolio versus the final one. Assuming the initial capital investment remains exactly the same for the investment…
