Monthly Portfolio Return Methodology

Portfolio return is calculated for varying time periods using the monthly returns for each holding, weighted appropriately.

Required Inputs for calculation

1. One-month portfolio return for each holding in the portfolio for the past 10 years.

2. Weighting of each holding in the portfolio.

Required Output

• Return for the portfolio for each month over the past 10 years.

Algorithm

R = Sum(Pi x Ri)

Where:

R  = Portfolio return for month K

Pi = % weighting of holding i in portfolio

Ri = % Holding i return for month

There is one adjustment that needs to be made to the data used in return calculations: We must adjust upward the weightings of securities that have returns for those that are lacking returns. For each month, add up the total percent of assets of holdings with returns. Let this be WT. If WT <75%, then we will footnote all returns and returns-based figures that use returns from that month.

Let W1, W2...Wn bet he unadjusted percent of assets each portfolio holding takes up. Adjust upward the weights for each of those holdings with the returns by dividing by WT. Call the adjusted weightings Wa,1 Wa,2...Wa,n. For each month, Wa,1 + Wa,2 + ...+Wa,n = 1.00

Use the modified returns and modified weightings to calculate the weighted average portfolio return. If ra,1, ra,2...ra,n are the adjusted monthly returns, then the monthly portfolio return for month n (called rp,n) is

rp,n = [wa,1(1 + ra,1)] + [wa,2(1 + ra,2)] +...+ [wa,n(1 + ra,n] -`1

Example 1

Lets say we have a portfolio with three securities, where returns are available during the period being considered for all three securities.

• Equity fund weighted return = 0.60 x 2.00 = 1.20

• Bond fund weighted return  = 0.20 x 1.10 = 0.22

• Tech stock weighted return = 0.20 x -0.05 = -0.01

Portfolio return for month j = 1.20 + 0.22 + (-0.01) = 1.31%

Example 2

Now lets say we have a portfolio with three securities, where returns are available during the period being considered for only two securities:

Step 1: Adjust weighting of securities with returns commensurate with indicated weighting. The numerator is the indicated weighting and the divisor is the sum of the indicated weighting of securities for which returns are available:

• Equity fund:    Wa,1 = 0.60/(0.60 + 0.20) = 0.75

• Bond fund:      Wa,1 = 0.20/(0.60 + 0.20) = 0.25

Step 2: Calculate portfolio return in accordance with new weightings

• Equity fund weighted return = 0.75 x 2.00 = 1.50

• Bond fund weighted return = 0.25 x 1.10 = 0.28

• Tech fund has no weighting in portfolio for month j.

Portfolio return for month j = 1.50 + 0.28 + 0 = 1.78%

Note: It is important to remember, as illustrated in the example above, that when a fund or stock drops out of the calculation for a given month, its weighting is not distributed equally over the remaining funds, but rather according to the weighting of the fund in the portfolio.