Portfolio Return

Portfolio return is a monetary return the investor gets due to the holding of a particular portfolio. Portfolio return can be calculated for a single day or for a longer period say a year or more. The base time period depends on the investors mind set of the investor. The portfolio return basically depends on two points they are dividend and capital appreciation. Portfolio return calculated by the below two methods are usually subjected to testing after certain period and the efficiency of the portfolio return measurement are analyzed.

The two ways of portfolio return calculations are,

• Time weighed is a method in which amount to be realized from the portfolio is kept constant whereas the time period varies. In this method the investor finds out the time period required to reach the desired level of profit. The time period doesn’t remain fixed. It varies each time based on the asset performance and the economical condition. This method can be mainly useful for long term investors who usually don’t have time constrain.
• Money weighed returns is a method in which the time period is kept constant whereas the money realized during these fixed time period over various period of a year are analyzed. The time periods usually taken into consideration are quarterly or annual. Money weighed returns method is basically used by day traders as they want to get back their investment in a short period of time.  It is also equivalent to internal rate of return method calculation.

Portfolio return is an important factor in making investment decisions. Portfolio returns are usually calculated by huge mutual fund companies and other big institutional investors. They have to make the correct estimate of the portfolio returns else the loss incurred by them will be huge as the investment made by them is also huge. It is usually vague when the investors invest in any investment without knowing the rough estimation of the return that they might expect from the investment. It is therefore very much important to know the portfolio return of the various investment options that are available to the investors.

Questions

• What are the two methods used to estimate the portfolio return?
• What are the advantages of using Money weighed return method in estimating the portfolio return?