Geoff, I don't have the article in front of me, but there are a couple of ways that I know of to calculate the rate of return. This method is probably the easiest. Let's say you have a portfolio of $1000, and you add $10 in cash at the end of the period. Lets say that at the end of the period the portfolio is worth $1022.
The periodic return is the the (ending value-cash in + cash out)/beginning value. So, we would have (1022-10+0)/1000 or 1.012. Let's say that in the next period there was a cash infusion of $10 and the portfolio was worth $1025. So, we have (1025-10+0)/1022 or 0.9932. Now, multiply those two numbers, so 1.012 x .9932 = 1.0051. Repeat this process for each subsequent period using the product previously generated.
Now, you need to annualize the return. Lets say you have 18 months of data, and the cumulative product was 1.47 (I'm making this number up).
you need to raise that product to the reciprocal of the number of years represented. In this case, 1/1.5 or .6667. So, we would have 1.47^.6667=1.2928, or an annualized 29.28% rate of return.
There are other methods, but this is probably the easiest. Remember, dividends and idle cash ready to be invested count as part of the portfolio.
Regards,
Paul |
