Performance Evaluation and Attribution of Security Portfolios

Chapter 10

Basic Performance Evaluation Models

Abstract

This chapter introduces the fundamental approaches for the computation of returns. The concepts of the time-weighted returns and the internal rate of return will be described in detail and compared. In practice, due to missing data, it is often not possible to compute these returns in an exact form. Therefore the most common approximation methods will be discussed. Furthermore, continuously compounded returns and different concepts for computing the active return are introduced.

10.1 Basis Formula for the Calculation of Returns

All measures for the assessment of the return discussed on this chapter are based on a simple formula for the return of a single investment without subsequent withdrawals ...