Calculation of Returns

Portfolio Returns

Generally speaking, there are 2 types of returns that can be calculated:

• Money-weighted rate of return (MWRR), i.e. Internal Rate of Return (IRR)
• Time-weighted rate of return (TWRR), i.e. Modified Dietz Return
  
  In my portfolio performance calculations, I use IRR.

Annualised Return

Accumulative Returns should be annualised when the period is beyond 1Y, so that they can be compared against different periods like for like.

Formula:

Internal Rate of Return (IRR)

The IRR is a money-weighted calculation. It provides a more accurate calculation of returns on the investment as an investor.

The calculation is done by the XIRR function using the scipy library.

Formula:


Source: https://www.investopedia.com/terms/i/irr.asp

Modified Dietz Return

Modified Dietz Return is a time-weighted calculation. This method is suitable for calculating returns for mutual funds as fund managers, because it emphasizes on the overall returns of the investment strategy, rather than the timing of cash flows (i.e. investors deposits & withdrawals).

Formula:


Source: https://www.canadianportfoliomanagerblog.com/how-to-calculate-your-modified-dietz-rate-of-return/