Modified Dietz method: Difference between revisions

Revision as of 19:40, 14 May 2025

Revision as of 19:42, 14 May 2025

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There are sometimes other difficulties when decomposing portfolio returns, if all transactions are treated as occurring at a single point during the day.

For example, consider a fund opening with just $100 of a single stock that is sold for $110 during the day. During the same day, another stock is purchased for $110, closing with a value of $120. The returns on each stock are 10% and 120/110 -− 1 = 9.0909% (4 d.p.) and the portfolio return is 20%. The asset weights ''w_i'' (as opposed to the time weights ''W_i'') required to get the returns for these two assets to roll up to the portfolio return are 1200% for the first stock and a negative 1100% for the second:

:w*10/100 + (1- − w)*10/110 = 20/100 → w = 12.

Such weights are absurd, because the second stock is not held short.

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:At the end of Day 40, the remaining 20 shares are worth 12.50 dollars per share

The gain or loss is end value -− start value + outflow:

:<math>20 \times 12.50 - 100 \times 10 + 80 \times 15</math>