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Evaluation of a portfolio of investments becomes necessary for individuals, firms, for mutual fund firms and also for academicians and researchers. Though the objective of research will naturally be different, the method of evaluation is the same for all of them.
Given here is an explanation of how portfolios are evaluated:
In the short run,say one year the total returns can be calculated as given below:
(Capital Appreciation* of the total portfolio; including cash and money market instruments)
+ (The income out of the portfolio and other capital distributions from the portfolio)
_ (The capital infusions into the portfolio)
* Capital Appreciation is calculated as follows:
(Market Value of the portfolio at the end of the period) - (Value of the portfolio at the beginning of the period)
When we consider the long run, the cash flow rate will need to be timed.This is because these are cash flows for the long run. Therefore, greater care will need to be taken to evaluate the portfolio return in the long run. This rate of return is precisely what we call the Internal Rate of Return.
Evaluation of a portfolio of investments becomes necessary for individuals, firms, for mutual fund firms and also for academicians and researchers. Though the objective of research will naturally be different, the method of evaluation is the same for all of them.
Given here is an explanation of how portfolios are evaluated:
In the short run,say one year the total returns can be calculated as given below:
(Capital Appreciation* of the total portfolio; including cash and money market instruments)
+ (The income out of the portfolio and other capital distributions from the portfolio)
_ (The capital infusions into the portfolio)
* Capital Appreciation is calculated as follows:
(Market Value of the portfolio at the end of the period) - (Value of the portfolio at the beginning of the period)
When we consider the long run, the cash flow rate will need to be timed.This is because these are cash flows for the long run. Therefore, greater care will need to be taken to evaluate the portfolio return in the long run. This rate of return is precisely what we call the Internal Rate of Return.
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