The Dietz Algorithm
The Income Builder newsletter uses the Dietz Algorithm for calculating returns on its model portfolios. The Dietz Algorithm is a method for calculating investment returns (internal rate of return) when the portfolio is subject to net contributions (redemptions) during the measured time interval. This method assumes that the net contributions (redemptions) are received evenly through the time interval. It accomplishes this by adding half of the net contributions to the beginning portfolio value and subtracting half of the contributions from the ending portfolio value.
In mathematical terms, the Dietz Algorithm is:
Ri = ((Pi -.5Ci)/(Po + .5Ci)-1) x 100
Po = portfolio value at beginning of time interval i
Pi = portfolio value at end of time interval i
Ci = net contributions during time interval i
Ri = net rate of return during time interval i
This method was first described in "Pension Fund Investment Performance - What Method to Use When." by Peter O. Dietz from the January/February 1966 issue of the Financial Analysts Journal.
Taken from Managing Investment Portfolios, A Dynamic Process, Edited by John L. Maginn and Donald L. Tuttle; Second Edition, 1990, Warren Gorham & Lamont
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