Dollar-weighted Formula
For most of us, investing is an active process. Investors switch, sell and make multiple purchases, and each of these transactions impacts their account's performance.
The dollar-weighted method allows us to accurately report
each investor’s performance starting with their first purchase.
The dollar-weighted method considers the size and timing of cash flows, as well as the performance of the investor's funds. Periods in which more money is invested contribute more to the overall return - thus the term "dollar-weighted."
The formula for the dollar-weighted rate of return:
BMV = Beginning Market Value
EMV = End Market Value
F = cash flow amount
t = time of cash flow
r = the internal rate of return (IRR) that equates everything on the right side of the equation to zero.
Example:
Transaction information:
- Beginning Market Value (BMV): Purchase, August 17, 2015 $265,931.65
- Cash flow 2: Purchase, December 8, 2015 $ 20,000.00
- Cash flow 3: Redemption, December 18, 2015 $ 1,144.36
- Cash flow 4: Purchase, May 18, 2016 $20,000.00
- End Market Value (EMV): as at September 30, 2016 $346,142.19
Rule: Solve for 0 (zero) to determine r
r = 0.12830944
Your Personal Rate of Return r = 12.83% (Not a de-annualized value)
Disclaimer: The above example is for illustrative purposes only and indicates a hypothetical personal rate of return using the variables indicated. A dollar-weighted return calculation will yield a different result as soon as any of the variables (such as date of purchase, size of initial investment, frequency of transactions) change. The fund series and purchase option selected may also influence the calculation of dollar-weighted return calculations. The above returns are not indicative of any past or future fund performance or returns.
For more information on how we calculate rates of return, please call our Client Services team at 1.800.387.0830