 Quote:
Originally Posted by saluki9
The most common method of performance calculation used in the investment industry is the Modified Dietz Method
Modified-Dietz Method r(T) = {MV(T)-MV(0)-sum[C(t)]}/{MV(0)+sum[w(t)*C(t)]}
r(T)... Modified Dietz Return
MV(T)... Ending market value
MV(0)... Beginning market value
C(t)... Net contribution occurring on day t
w(t)... weight of the net contribution on day t... w(i) = {T - t} / T
T... Total number of days
t... day the net contribution occurs
The Modified Dietz method assumes that net contributions are invested at the end of the respective day they occur. |
We are on the same page here. If it is assumed that all deposits and withdrawals are made in one lump sum in the middle of the period then the formula I posted is numerically identical to the Modified Dietz Return formula you posted
Clearly, the Modified Dietz Return is more accurate if this is not a reasonable assumption. The more the cash flow is skewed toward one end or the other of the period, the more error my simplifying assumption introduces.
Even the Modified Dietz Return is slightly off, in that it does not quite account correctly for compounding effects. I don't think that there is a closed function that is 100% accurate, hence the use of XIRR iterative numerical approximation.
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