The modified Dietz method is a measure of the historical performance of an investment portfolio in the presence of external flows. (External flows are movements of value such as transfers of cash, securities or other instruments in or out of the portfolio, with no equal and opposite movement of value in the opposite direction, and which are not income from the investments in the portfolio, such as interest, coupons or dividends.) To calculate the modified Dietz return, divide the gain or loss in value, net of external flows, by the average capital over the period of measurement. The result of the calculation is expressed as a percentage rate of return for the time period. The average capital weights individual cash flows by the amount of time from when those cash flows occur until the end of the period.
The formula for modified Dietz is as follows:
where:
EMV = ending market value
BMV = beginning market value
F = the net external inflow for the period (contributions to a portfolio are entered as positive flows while withdrawals are entered as negative flows)
and
the sum of each flow, multiplied by its weight
The weight is the proportion of the time period between the point in time when the flow occurs and the end of the period. can be calculated as:
where:
CD = the number of calendar days during the return period being calculated
Di = the number of days from the start of the return period until the day on which the flow Fi occurred.
Read more about Modified Dietz Method: Discussion/derivation
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