Portfolio Professional - U.R.M. Powered Software by Sironix

Performance Measurement Basics
As a very simple example, consider the following.

If you invest $10,000 today in a particular mutual fund and it is worth $12,000 exactly 2 years later you can describe your investment performance in several ways.

  1. Your total gain was $2,000
  2. Your simple return on investment was 20%
  3. Your average annual compound rate of return was about 9.545%

Each of the above is an accurate description of performance, but the first two don't take the time period into consideration. In fact, if you reduced the interval to 6 months, the first two statements would remain true. However, the third statement would change to indicate an annualized rate of return of 44%.

This example involves a single transaction only. In many cases, securities are bought and sold more than once in an investment period. In these cases, multiple transactions have to be considered when calculating performance.

Portfolio Professional measures performance by comparing the amounts invested with the value of these investments at various points in time. Growth or loss for an investment can be described in any of the following ways as in the previous example.

  • Total Net Dollar Gain
  • Simple ROI % (Return on Investment)
  • Rate of Return

Measuring volatility (or risk) in your portfolio is equally as important as measuring performance. Portfolio Professional compares the volatility in your individual investments by analyzing their monthly performance results over various periods of time.

The following sections provide additional details for each of the topics above.

Total Net Dollar Gain
Total Net Dollar Gain is simply the difference between the value of an investment today and the value of the investment at an earlier time less any net change due to transactions between the two dates.

For example, if the value of mutual fund X was $5000 last year and is $8000 today and you purchased $2000 worth of the fund within the last year, the Total Net Dollar Gain for the 1 year period is $1000.

Similarly, if the value of mutual fund X was $5000 last year and is $6000 today and you sold $2000 worth of the fund within the last year, the Total Net Dollar Gain for the 1 year period is $3000.

Total Net Dollar Gain = Forward Value - Total Buys + Total Sells

or alternatively

Total Net Dollar Gain = Realized Gain + Unrealized Gain

Simple ROI % (Return on Investment)
Simple ROI % is calculated from gain and total amount invested. It disregards the dates when investments were actually made. For example, if you bought $10,000 of a stock and sometime later it was worth $15,000, your ROI would be 50%. It would make no difference whether the elapsed time was 1 month or 5 years. The return on the investment would still be 50%. This method of measuring performance is not really very useful when comparing investments.

Simple ROI % = Total Net Dollar Gain / Total Buys

Rate of Return
Rate of Return expresses your net dollar gain or loss as an equivalent compound rate. It is calculated from a cashflow analysis of the amounts invested and the associated transaction dates in the interval being considered. It represents the single average compound rate that when applied to the set of cashflows would make their combined forward value equal to the actual forward amount or current statement value.

Each cashflow is essentially a dollar amount (A) that has a term in years (t) to the end date. The sum of their forward values using the average compound rate can be expressed as follows.

Compounding Equation

The rate of return that is calculated and reported in Portfolio Professional is the solution to the above equation for r when the A's, the t's and the forward amount are all known.

This method of measurement is the most useful when comparing investments with varied cashflows and durations. Rate of Return is always annualized. Compounding frequency can be annual (recommended), semi-annual or daily. The default frequency is annual but this can be changed using the preferences screen within the application.

Lifetime performance is determined from the most recent value and all earlier transactions.

Interval performance is determined from the current value and a previous value. Only the transactions falling between today's date and the previous date are considered.

Volatility and Risk
Performance volatility is a measure of the variability of an investment's rate of return. Specifically, it is the standard deviation of the sample set of monthly returns that have been observed for the investment over the interval being considered.

For example, assume that $10,000 was invested several years ago in mutual fund X and also in mutual fund Y and that today they are each worth $15,000. Perhaps the value of mutual fund X varied considerably, at some points as low as $7,000 and at other points as high as $17,000. If the value of mutual fund Y grew steadily from $10,000 to $15,000, it's computed volatility would be significantly lower than that of fund X.

Volatility is often used to quantify risk. It is important to consider how much risk you are being subjected to when you compare investment performance. Volatility calculation allows you to compare your investments in terms of risk as well as performance as shown below.

  • high return / high risk
  • high return / low risk
  • low return / high risk
  • low return / low risk

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