Measuring Portfolio Returns - Introduction

Measuring Portfolio Returns
There are a number of ways to calculate the investment return of an account. Some of these (real return and risk-adjusted return) were discussed in the Quantitative Methods section . You will not be tested on the actual formulas, so they are not included here (other than those provided for clarity). In this section we'll focus on return measures such as the following:

  • Return on investment - This is the classic measure of performance, taking into account all cash flows (including dividends, interest, return of principal, and capital gains). To calculate, simply divide the sum of all cash flows by the number of years the investment is held, and then divide that amount by the original amount invested.
     
  • Holding period return - Refers to the return for the period of time the investment was actually held. This can be more meaningful than an annualized rate of return, particularly for investments held short term.

    The standard deviation of returns depends on the holding period, since stock returns are more volatile over shorter periods. As a result:

    • the shorter the holding period, the greater the variability of the return;
       
    • the longer the holding period, the smaller the variability of the return.
       
  • Annualized return- Also referred to as average return, this expresses the geometric rate of return of a portfolio over any given period into an annual basis - in other words, it provides the average annual return per year over that period.
     
  • Risk-free rate of return - The current rate for 90 day Treasury bills is typically used in calculations such as risk-adjusted return and the Sharpe ratio.
     
  • Total return - This incorporates the rate of return from all sources, including appreciation (or depreciation), dividends and interest.
Other Terms


Related Articles
  1. Investing Basics

    Calculating Annualized Total Return

    The annualized total return is the average return of an investment each year over a given time period.
  2. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  3. Professionals

    How To Measure Returns On The Series 65 Exam

    An investor who is evaluating the performance of a portfolio manager must take into consideration the impact that any contributions or withdrawals made by the investor will have on the overall ...
  4. Investing Basics

    More Ways to Evaluate Portfolio Performance

    The Jensen measure is another tool investors use to include risk when measuring portfolio performance.
  5. Fundamental Analysis

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  6. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  7. Investing

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  8. Bonds & Fixed Income

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  9. Investing

    4 Benefits of Holding Stocks for the Long Term

    Discover some of the benefits that come from buying and holding stocks for longer periods of time, such as tax savings and risk minimization.
  10. Term

    What's a Real Rate of Return?

    A real rate of return is an annual percentage investment return that’s adjusted for inflation, taxes or other factors.
RELATED TERMS
  1. Return

    The gain or loss of a security in a particular period. The return ...
  2. Annualized Total Return

    The average amount of money earned by an investment each year ...
  3. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  4. Absolute Return

    The return that an asset achieves over a certain period of time. ...
  5. Inflation-Adjusted Return

    A measure of return that accounts for the return period's inflation ...
  6. Rolling Returns

    The annualized average return for a period ending with the listed ...
RELATED FAQS
  1. What is the difference between a company's annual return and its annualized return?

    Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >>
  2. How is the expected market return determined when calculating market risk premium?

    Find out how the expected market return rate is determined when calculating market risk premium and how these figures are ... Read Answer >>
  3. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
  4. What is the difference between a sharpe ratio and an information ratio?

    Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >>
  5. What can cause the rate of return to be negative?

    Learn how poor company or sector performance, economic turmoil and inflation can cause the rate of return on an investment ... Read Answer >>
  6. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center