Simple Dietz Method
Encyclopedia
Simple Dietz Method is a means of calculating an approximation of investment portfolio performance during a period of external cash flows into/out of the portfolio. It addresses some of the weakness of the Internal Rate of Return
(IRR) calculation.
The Simple Dietz Method calculates performance as follows:
Where
is the starting value of the portfolio, 
is the ending value of the portfolio, 
is the portfolio rate of return, and 
is the total external cash flows during the period (cash flows out of the portfolio are negative and cash flows into the portfolio are positive). This method assumes that all such cash flows are made mid-way through the period of analysis.
This method is somewhat more computationally tractable than IRR
. However, the assumption that all cash flows are made at precisely the middle of the evaluation period remains troubling. This deficiency was the inspiration for the Modified Dietz Method
, a clear improvement for the general case where there are cash flows which are not made at the midpoint of the period being analyzed.
Like the more general Modified Dietz Method
, the Simple Dietz Method is only an approximation. The only precisely correct means of calculating returns in the presence of external cash flows is to use the True Time-Weighted Rate of Return
.
Internal rate of return
The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
(IRR) calculation.
The Simple Dietz Method calculates performance as follows:
Where
is the starting value of the portfolio, is the ending value of the portfolio, is the portfolio rate of return, and is the total external cash flows during the period (cash flows out of the portfolio are negative and cash flows into the portfolio are positive). This method assumes that all such cash flows are made mid-way through the period of analysis.This method is somewhat more computationally tractable than IRR
Internal rate of return
The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
. However, the assumption that all cash flows are made at precisely the middle of the evaluation period remains troubling. This deficiency was the inspiration for the Modified Dietz Method
Modified Dietz Method
The Modified Dietz Method is a calculation used to determine an approximation of the performance of an investment portfolio based on money-weighted cash flow...
, a clear improvement for the general case where there are cash flows which are not made at the midpoint of the period being analyzed.
Like the more general Modified Dietz Method
Modified Dietz Method
The Modified Dietz Method is a calculation used to determine an approximation of the performance of an investment portfolio based on money-weighted cash flow...
, the Simple Dietz Method is only an approximation. The only precisely correct means of calculating returns in the presence of external cash flows is to use the True Time-Weighted Rate of Return
True time-weighted rate of return
True Time-Weighted Rate of Return is a way to measure the performance of an investing portfolio in the presence of external cash flows. It determines the return for an investor who has not invested any additional cash flows during the investment period:...
.
See also
- Internal Rate of ReturnInternal rate of returnThe internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
- Modified Dietz MethodModified Dietz MethodThe Modified Dietz Method is a calculation used to determine an approximation of the performance of an investment portfolio based on money-weighted cash flow...
- Rate of ReturnRate of returnIn finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
- True Time-Weighted Rate of ReturnTrue time-weighted rate of returnTrue Time-Weighted Rate of Return is a way to measure the performance of an investing portfolio in the presence of external cash flows. It determines the return for an investor who has not invested any additional cash flows during the investment period:...