Simple Dietz method

The simple Dietz method is a means of calculating an approximation of investment portfolio performance during a period of external cash flows into/out of the portfolio. It addresses some of the weakness of the Internal Rate of Return (IRR) calculation.

The simple Dietz method calculates performance as follows:

$R={\frac {M_{2}-M_{1}-C}{M_{1}+{\frac {C}{2}}}}$

Where $M_{1}$ is the starting value of the portfolio, $M_{2}$ is the ending value of the portfolio, $R$ is the portfolio rate of return, and $C$ is the total external cash flows during the period (cash flows out of the portfolio are negative and cash flows into the portfolio are positive). This method assumes that all such cash flows are made mid-way through the period of analysis.

This method is somewhat more computationally tractable than IRR. However, the assumption that all cash flows are made at precisely the middle of the evaluation period remains troubling. This deficiency was the inspiration for the modified Dietz method, a clear improvement for the general case where there are cash flows which are not made at the midpoint of the period being analyzed.

Like the more general modified Dietz method, the simple Dietz method is only an approximation. The only precisely correct means of calculating returns in the presence of external cash flows is to use the true time-weighted rate of return.

See also

• Internal rate of return
• Modified Dietz method
• Rate of return
• True time-weighted rate of return