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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.
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.
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.
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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False, the y-axis.
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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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