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How do you compute the overall rate of return on an investment portfolio when different investments earn different rates of return?
Wiki User
∙ 16y ago
There is no need to calculate return rates of the parts of a portfolio to calculate its overall rate of return. If you want to calculate Internal Rate of Return, all you need is the beginning and ending values of the entire portfolio, and timing and values of cash inflows and outflows to and from the portfolio. Then you can use a financial calculator or spreadsheet with Time Value of Money function. You can also do it by hand if you know the formula. In case you want to calculate Time Weighted Return, you need the beginning value, the values immediately before and after each inflow and outflow, and the ending value. Time Weighted Return is comparable with relevant market indices, e.g., S&P 500; Internal Rate of Return can be compared with alternative investments, e.g. bank CDs, to evaluate which would have been more profitable for you. In other words, TWR excludes the impact of cash flows. IRR, on the other hand, take them into account. With annualized 7 percent TWR, for example, the interpretation would be: after one year every US Dollar in my portfolio made me 7 cents. You cannot interpret IRR the same way. It is only good for comparing to other IRRs.
Wiki User
∙ 16y ago
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How do you compute the risk-adjusted return on an investment?
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