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|url=https://books.google.com/books?id=ZUQ_MwEACAAJ
|year=1966
|publisher=Free Press}}</ref><ref>{{Cite journal|last=Dietz|first=Peter|date=May 1968|title=Measurement of Performance of Security Portfolios COMPONENTS OF A MEASUREMENT MODEL: RATE OF RETURN, RISK, AND TIMING|journal=The Journal of Finance|volume=
|author1=Philip Lawton, CIPM
|author2=Todd Jankowski, CFA
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|isbn=978-0-470-47371-9
|pages=828–
|quote=Peter O. Dietz published his seminal work, Pension Funds: Measuring Investment Performance, in 1966. The Bank Administration Institute (BAI), a U.S.-based organization serving the financial services industry, subsequently formulated rate-of-return calculation guidelines based on Dietz's work.}}</ref> is a measure of the ''ex post'' (i.e. historical) performance of an [[investment portfolio]] in the presence of external flows. (External flows are movements of value such as transfers of cash, securities or other instruments in or out of the portfolio, with no equal simultaneous movement of value in the opposite direction, and which are not income from the investments in the portfolio, such as interest, coupons or dividends.)
To calculate the modified Dietz return, divide the gain or loss in value, net of external flows, by the average capital over the period of measurement. The average capital weights individual cash flows by the length of time between those cash flows until the end of the period. Flows which occur towards the beginning of the period have a higher weight than flows occurring towards the end. The result of the calculation is expressed as a percentage [[rate of return|return]] over the holding period.
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==Comparison with time-weighted return and internal rate of return==
The modified Dietz method has the practical advantage over the [[true time-weighted rate of return]] method, in that the calculation of a modified Dietz return does not require portfolio valuations at each point in time whenever an external flow occurs. The [[internal rate of return]] method shares this practical advantage with the modified Dietz method.
With the advance of technology, most systems can calculate a time-weighted return by calculating a daily return and geometrically linking in order to get a monthly, quarterly, annual or any other period return. However, the modified Dietz method remains useful for performance attribution, because it still has the advantage of allowing modified Dietz returns on assets to be combined with weights in a portfolio, calculated according to average invested capital, and the weighted average gives the modified Dietz return on the portfolio. Time weighted returns do not allow this.
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:<math>\frac {\text {gain or loss}}{\text {average capital}} = \frac {450}{-50} = -900 \%</math>
Instead, we notice that the start value is positive, but the average capital is negative. Furthermore, there is no short sale. In other words, at all times, the number of shares held is positive.
We then measure the simple return from the shares sold:
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and combine these returns with the weights of these two portions of the shares within the starting position, which are:
:<math>\frac {80}{100} = 80 \%</math> and <math>\frac {20}{100} = 20 \%</math> respectively.
This gives the contributions to the overall return, which are:
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====Limitations====
This workaround has limitations. It is possible only if the holdings can be split up like this.
It is not ideal, for two further reasons, which are that it does not cover all cases, and it is inconsistent with the Modified Dietz method. Combined with Modified Dietz contributions for other assets, the sum of constituent contributions will fail to add up to the overall return.
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