MEASURING INVESTMENT PERFORMANCE

About the Book

The simple formula for Return on Investment during a period---the one you probably know by heart---does not compute in the presence of cash flows (deposits or withdrawals) during the period. The author examined the modification by Joseph Dietz in 1966 to incorporate cash flows, but his approach is not exact. The more recent Time Weighted Return method circumvents cash flows exactly. Finally, the Internal Rate of Return method includes all cash flows and their dates. All methods can give different values and they do have different meanings. This book explains the equations behind all methods mentioned and instructs on the construction of a personal spreadsheet. Alternately, Excel spreadsheets may be obtained from the author’s email address. Finally, the reader’s stock broker may have the methods installed on company computers, and will provide help in accessing and using them. For all alternatives, this book provides insight into each method and its interpretation.

About the Author

The author has an MS degree in Mathematics from the University of Washington. He was an aerospace engineer for 38 years, taught algebra at Santa Barbara City College for eleven years, and then retired. To fill his time subsequently, he began to manage his retirement account---depositing and withdrawing funds, identifying stocks to purchase and sell. To grade his management he researched methods to calculate rates of return and discovered a hidden story behind the methods. This book tells this story as an algebra teacher would teach it.