THOUGHT OF THE WEEK
Measuring Portfolio Investment Returns
The main reason for investing money is to receive some returns on amount invested funds. Measuring investment returns is not always a straight forward exercise as there are different metrics that can be used to determine investment returns. The Return on Investment is one metric which directly measures return on investment relative to the amount invested. In order to determine the return on an investment portfolio, the contribution of each investment within the portfolio must be determined.
There are many factors which affect the return of investments. These factors include economic factors, political forces, market sentiments and corporate actions. These factors make it difficult to predict the return on investment with absolute certainty. Calculating a portfolio return must therefore take into consideration money spread across different investment vehicles.
In order to calculate portfolio investment return, the first step is to identify and gather the requisite data. The data to gather include the total amount of money invested including fees and the average return on individual investments. After gathering the necessary data, the next thing is to define the period over which the return is to be calculated. The period could be daily, weekly, monthly, quarterly, or annually. Total value of the various investments as well as cash flows received over the defined period must be determined.
The holding period return (HPR) is one of the simplest way of determining return of a portfolio. Once the value of investments and cash received from investment over the defined period is determined, the holding period return can be calculated. HPR=Cash flow + (Total investment value at the beginning of period – initial investment ÷ Amount invested.
The holding period return is useful in comparing returns on investment held for different period of time. In essence it’s the total return from holding a portfolio of assets or a single asset over a period of time.
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