This paper introduces new money-weighted metrics for investment performance analysis, based on arithmetic means of holding period rates weighted by the investment’s market values. This approach generates rates of return which measure a fund’s or portfolio’s performance and a fund manager’s performance. It also enables to show that the Internal Rate of Return (IRR) is a weighted mean of holding period rates associated with interim values which differ from market values, so that value additivity is violated. The manager’s Arithmetic Internal Rate of Return (AIRR) is shown to be the true period equivalent of the cumulative Time Weighted Rate of Return (TWRR), whereas the period TWRR (a geometric return) provides a different ranking. The method is easily generalized for coping with varying benchmark rates. We also cope with the practical problem of estimating interim values whenever they are not available.

Arithmetic returns for investment performance measurement / Magni, Carlo Alberto. - In: INSURANCE MATHEMATICS & ECONOMICS. - ISSN 0167-6687. - STAMPA. - 55:1(2014), pp. 291-300. [10.1016/j.insmatheco.2014.02.005]

Arithmetic returns for investment performance measurement

MAGNI, Carlo Alberto
2014

Abstract

This paper introduces new money-weighted metrics for investment performance analysis, based on arithmetic means of holding period rates weighted by the investment’s market values. This approach generates rates of return which measure a fund’s or portfolio’s performance and a fund manager’s performance. It also enables to show that the Internal Rate of Return (IRR) is a weighted mean of holding period rates associated with interim values which differ from market values, so that value additivity is violated. The manager’s Arithmetic Internal Rate of Return (AIRR) is shown to be the true period equivalent of the cumulative Time Weighted Rate of Return (TWRR), whereas the period TWRR (a geometric return) provides a different ranking. The method is easily generalized for coping with varying benchmark rates. We also cope with the practical problem of estimating interim values whenever they are not available.
2014
55
1
291
300
Arithmetic returns for investment performance measurement / Magni, Carlo Alberto. - In: INSURANCE MATHEMATICS & ECONOMICS. - ISSN 0167-6687. - STAMPA. - 55:1(2014), pp. 291-300. [10.1016/j.insmatheco.2014.02.005]
Magni, Carlo Alberto
File in questo prodotto:
File Dimensione Formato  
INSUMA 2014 Arithmetic return.pdf

Accesso riservato

Tipologia: Versione pubblicata dall'editore
Dimensione 528.69 kB
Formato Adobe PDF
528.69 kB Adobe PDF   Visualizza/Apri   Richiedi una copia
Pubblicazioni consigliate

Licenza Creative Commons
I metadati presenti in IRIS UNIMORE sono rilasciati con licenza Creative Commons CC0 1.0 Universal, mentre i file delle pubblicazioni sono rilasciati con licenza Attribuzione 4.0 Internazionale (CC BY 4.0), salvo diversa indicazione.
In caso di violazione di copyright, contattare Supporto Iris

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1004117
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 9
  • ???jsp.display-item.citation.isi??? 8
social impact