3-10349-Modified-Dietz-Method PDF

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MODIFIED DIETZ METHOD

The Basics

Modified Dietz Method Sample

Bell Bank uses the Modified Dietz Method to calculate

Let’s look at a sample to better understand the formula for

personal rate of return on plan participant websites and

the Modified Dietz Method: John would like to calculate

quarterly statements. The Modified Dietz Method takes

his rate of return for the month of April using the Modified

into account these factors to determine your personal rate of return:

Dietz Method. On April 1, John’s account has $1,000, and on April 30, John’s account has an ending balance of

■ The ■ market value of your holdings at the beginning of the measured period

$1,600. On April 15, John made a contribution of $500.

■ The ■ market value of your holdings at the end of the measured period

■ Based ■ on the above information we can solve for the top part of the equation because we know that: EMV = $1,600 BMV = $1,000 F = $500

■ All ■ cash flows in your account during that measured time period, including contributions, withdrawals and fees

■ Now ■ let’s look at the lower part of the equation. The portion of the equation can be translated to:

■ The ■ length of time each cash flow occurrence is maintained in your account The Modified Dietz Method provides a more comprehensive method of calculating personal rate of

CD – Number of calendar days during the period being calculated D – The number of days from the start of the period until the day on which the flow occurred

return by accounting for not only the performance of

For this example, there is only one cash flow

your investments but also the timing, amount of your contributions, withdrawals and fees.

transaction in this period. For multiple cash flow transactions in a period, you would need the weighted sum for all cash flow occurrences.

Modified Dietz Method Formula

Based on the information we have on John’s account,

Below is the formula for the Modified Dietz Method:

we now know: CD = 30

D = 15

■ The ■ final equation for calculating the rate of return using the Modified Dietz Method for this example is: EMV = Ending market value BMV = Beginning market value F = Net cash flows W = Weight of each cash flow on the portfolio between the time period they occurred and at the end of the period

The rate of return for this example is 8%.

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