Pseudo-Naive Approaches to Investment Performance Measurement

This paper makes use of Magni's (2013) Average Interest Rate (AIR) in order to fi nd a performance index which does not depend on the valuation rate (i.e., benchmark return). To this end, we distort the AIR by dropping the discount factors in the formula. The resulting modi ed AIR (MAIR) is the ratio of overall (undiscounted) return to overall (undiscounted) capital. While seemingly a na ive metric, we show that it is a genuinely internal metric, capable of capturing an investment's economic profi tability, as long as it is compared with an appropriate cuto rate which adequately takes account of the opportunity cost of capital. The not-so na ve MAIR is then extended to several di erent capital bases; the result is that other well-known (allegedly na ve) metrics, such as cash multiple, undiscounted pro tability, Modi ed Dietz and Simple Dietz return are given economic signi cance: each such metric is a (pseudo-na ve) performance index that correctly expresses the investment's amount of return per unit of a speci c capital: overall capital, initial investment, total cash out ow, average cash out ow). Keywords. Finance, investment,