| Q. Who was the Investment Performance Calculator created for? |
| A. The Investment Performance Calculator was created to provide investment professionals and individual
investors an easy way to calculate time and dollar weighted rates of return on any investment. It was also
created to assist anyone that needs to calculate a time weighted
rate of return that follows the calculation methodology requirements set forth by the AIMR-PPS (GIPS) standards. |
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| Q. What methodology is used to calculate rates of return? |
| A. The Investment Performance Calculator uses the Dietz Midpoint formula for calculating
time-weighted rates of return. Compounding is performed monthly. Dollar weighted rates of return are calculated using the
internal rate of return. All returns greater than 1 year are annualized. |
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| Q. Is The Investment Performance Calculator GIPS/AIMR compliant? |
| A. The time-weighted calculation used by The Investment Performance Calculator
follows the calculation methodology requirements defined in the GIPS (Global Investment Performance Standards) and AIMR-PPS(Performance Presentation Standards).
Full GIPS/AIMR-PPS compliance is composed of many components of which Calculation Methodology is only one. Other areas
that need to be addressed for GIPS/AIMR compliance include: Input Data, Composite Construction, Disclosures, and Presentation &
Reporting. For further details please contact the CFA Institute who created and manages these standards along with their partners. |
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| Q. What is a Time-Weighted Rate of Return? |
| A. A Time-Weighted Rate of Return is a series of geometrically linked Internal Rates of Return. |
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| Q. What is a Dollar-Weighted Rate of Return (ROR)? |
| A. A Dollar-Weighted ROR is a return that reconciles the beginning dollar amount of an investment plus cash flows with the ending value. An Internal Rate of Return is a Dollar-Weighted ROR. |
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| Q. How is a Time-Weighted ROR different than a Dollar-Weighted ROR? |
A. A Time-Weighted ROR differs from a Dollar-Weighted ROR in the following ways:
1. Time-weighted returns split up the time for which a return is going to be calculated into equal sub-periods. The IRR does not split up the time period into equal sub-periods; instead it searches for a constant rate of return for one entire time period. The Investment Performance Calculator uses monthly sub-periods to perform it’s time-weighted calculation.
2. Time-weighted returns calculate the value of a portfolio or investment for each sub-period. The IRR does not. For a time-weighted return to be calculated accurately it requires keeping the historical values of the investment for the beginning and end of each sub-period. To calculate time-weighted returns accurately with The Investment Performance Calculator you should enter the historical value for every investment monthly.
3. Time-weighted returns calculate the IRR for each sub-period. As previously mentioned this requires keeping the historical values of the investment. You must also maintain the time that each cash flow occurs during a sub-period. Historical value or pricing information is not used when calculating a dollar-weighted return or IRR.
4. Time-weighted returns tie all sub-period returns together to form the final rate of return using geometric linking. By geometrically linking the IRR's from each sub-period a time-weighted return eliminates any skewing of returns that will be calculated when large cash flows move though an investment. This is not the case with a dollar-weighted return or IRR. Dollar-weighted returns can be heavily changed depending on if and when large cash flows in and/or out of an investment occur.
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| Q. Why would someone want to use a Time-Weighted ROR? |
A. Dollar-Weighted rates of return will vary greatly depending on the timing of cash flows through an investment or portfolio. Professional money managers choose to use a Time-Weighted ROR because it eliminates the effects of large cash flows that they have no control over. Time-Weighted calculations allow the returns of different money managers to be compared against other benchmarks more equally.
Time-Weighted rates of return can also be helpful to individual investors who have large cash flows (more than 5% of an investments current value) on any portion of their portfolio. A time-weighted calculation would for instance allow an individual to better judge how two mutual funds returns compared even though one or both of the funds had large cash flows from the individual at different points in time.
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| Q. How are transactions managed by The Investment Performance Calculator? |
A. The following transactions may be entered into The Investment Performance Calculator: Contributions,
Withdrawals, and Dividend/Distribution Reinvested.
Cash Contributions and Withdrawals
Contributions and Withdrawals are used to enter any event that affects the value of an investment by
creating a cash flow into or out of the portfolio. Dividends or interest paid and taken out of the
portfolio must be entered as a withdrawal.
Dividend/Distribution Reinvested
Dividends/Distributions Reinvested may be entered by users who want to track the cost basis of an
investment and any potential taxable events. Since these amounts are reinvested and stay in the
portfolio they are not treated as a cash flow when measuring investment performance. They instead
represent an appreciation in the value of the portfolio and must be taken into account when entering
the Historical Value of the investment.
Other Transactions - Accrued Income
Accrued income should be accounted for when entering the monthly Historical Value of a fixed
income security.
Closing Out An Investment
When closing out an investment using The Investment Performance Calculator do not enter the final
withdrawal transaction. Instead you only need to enter the last Historical Value of the investment.
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| Q. How are short sales handled? |
| A. The Investment Calculator tracks the cash flows in and out of an
investment along with the historical values. As such it can be used to calculate the performance of any
investment including short positions. A short position would factor in when you calculate the market value
of your investment to be entered in the "Historical Values" tab of the Investment Details window. How you
calculate the value of a short position is a separate topic and there are many seperate good references that cover this.
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| Q. Can I import data from other systems for calculating returns? |
| A. Yes, you can import transactions (cash flows in and out of the investment) and historical pricing
or value information into the Investment Performance Calculator per investment. The data imported must be in either a
comma delimited or XML ASCII file format. The format of these import files is described in more detail in the Help facility
installed with the software. See the "Importing and Exporting Data" section of the help file for more information. |
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| Q. What is the Association for Investment Management and Research (AIMR) and what does it have to do with calculating rates of return? |
| A. AIMR is a global nonprofit organization that provides knowledge to investment professionals and promotes standards within the investment industry. The most well known program that AIMR oversees is the Chartered Financial Analyst (CFA) designation. AIMR also sets investment performance presentation standards (AIMR-PPS). AIMR-PPS are guidelines that define how investment performance should be calculated and reported. |
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