Portfolio Return Definition, Calculation and Quiz for Investment Modeling

Understanding the Nuances of Portfolio Return

Beginner

Portfolio Return is the calculation of return on a portfolio of stocks, bonds, cash or other assets. The calculation can be complex or easy depending on whether it is a holdings-based calculation or a returns-based calculation.

In a holdings-based calculation for each period multiply portfolio weights times the return on each asset. A simple two-stock calculation formula is provided below as an illustration.

Portfolio Return = ABC Weight * ABC Return + XYZ Weight * XYZ Return

This type of calculation is easy to perform with Excel's =SUMPRODUCT() function which calculates the sum of products and can be applied to many investments. Once sub-period returns are calculated, they can be linked using arithmetic or geometric returns.

For returns-based calculations, using pooled investments with a value, like the Net Asset Value on a mutual fund, the calculation is much simpler. It's the ending value divided by the beginning value, plus an adjustment for splits and cash flows, then subtract one.

Portfolio Return = (Ending Value / Beginning Value) - 1

Synonym: fund return

For context, recall that it is common for small investors to calculate portfolio returns over longer periods, like months, quarters or years. Here they make sub-period calculations less frequently. This is because the calculation can be time-consuming and the technical capabilities offered in costly portfolio accounting programs may not be available. Practitioners at institutional firms often calculate and link returns on a daily basis because they have the tools readily available.

In a Sentence

Wes: Did you ever consider that our firm's success depends on your portfolio return?
Eve: Not until you put it that way.

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Quiz

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Portfolio Return is normally depicted on the x-axis in a risk-return plot. | True or False?

False, the y-axis.

Linking daily returns using holdings-based calculations is preferred by institutional asset management firms. | True or False?

True

Questions or Comments?

Still unclear on the calculation of Porfolio Return? Check out the Quant 101 Series of free financial modeling tutorials, and specifically Calculate Monthly Stock Returns Accurately.

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Portfolio Return Definition, Calculation and Quiz