Modified Dietz method: Difference between revisions

Revision as of 03:39, 14 November 2020

Revision as of 12:45, 24 February 2021

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The modified Dietz method is different from the [[simple Dietz method]], in which the cash flows are weighted equally regardless of when they occurred during the measurement period. The [[simple Dietz method]] is a special case of the Modified Dietz method, in which external flows are assumed to occur at the midpoint of the period, or equivalently, spread evenly throughout the period, whereas no such assumption is made when using the Modified Dietz method, and the timing of any external flows is taken into account.

Note that in the example above, the flow occurs midway through the overall period, which matches the assumption underlying the simple Dietz method. This means the simple Dietz return and modified Dietz return are the same in this particular example.

==Money-weighted return==

The Modified Dietz return is money-weighted (as opposed to [[time-weighted return|time-weighted]]). If the Modified Dietz return earned on a portfolio with average capital <math>A_1</math> over a holding period is <math>R_1</math>, the average capital over the same holding period on second portfolio is <math>A_2</math>, and the Modified Dietz return earned on the second portfolio is <math>R_2</math>, then the Modified Dietz return earned on the combined portfolio, including both these portfolios, is the weighted average Modified Dietz return:

:<math>W_1 R_1 + W_2 R_2</math>

where

:<math>W_1 = \cfrac {A_1}{A_1 + A_2}</math>

and

:<math>W_2 = \cfrac {A_2}{A_1 + A_2}</math>

==Adjustments==

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==Money-weighted return==

The modified Dietz method is an example of a money (or dollar) weighted methodology (as opposed to [[time-weighted return|time-weighted]]). In particular, if the modified Dietz return on two portfolios are <math>R_1</math> and <math>R_2</math>, measured over a common matching time interval, then the modified Dietz return on the two portfolios put together over the same time interval is the weighted average of the two returns:

:<math>W_1 \times R_1+W_2 \times R_2</math>