Modified Dietz method: Difference between revisions

Revision as of 01:59, 10 November 2021

Revision as of 02:14, 10 November 2021

Line 118:

so in this case, the modified Dietz return is noticeably less than the unannualized IRR. This divergence between the modified Dietz return and the unannualized internal rate of return is due to a significant flow within the period, and the fact that the returns are large.

The IRR is 50% since:

The IRR is 50% (since 100 x (1 + 50%)^2 + 50 x (1+50%) = 300), but the unannualized holding period return, using the IRR method, is 125%.

:<math>100 \times (1 + 50\%)^2 + 50 \times (1+50\%)^ 1 = 225 + 50 \times 150\% = 225 + 75 = 300</math>

but the unannualized holding period return, using the IRR method, is 125%. Compounding an annual rate of 50% over two periods gives a holding period return of 125%:

:<math>(1 + 50\%)^2 - 1 = 2.25 - 1 = 1.25 = 125\%</math>

==The simple Dietz method==