## How to Calculate Your Modified Dietz Rate of Return (ModDietz)

The Modified Dietz rate of return attempts to estimate a money-weighted rate of return (MWRR) by weighting each cash flow by the proportion of the measurement period it is present or absent from the portfolio.

Similar to the money-weighted rate of return, the calculation requires the investor to know the portfolio values at the start and end of the measurement period, as well as the cash flow amounts and dates when each cash flow occurs.  Unlike the MWRR, the calculation does not require an exhaustive trial and error procedure, or sophisticated computing power.

Source:  CFA Institute

The Modified Dietz rate of return can differ substantially from the time-weighted rate of return (TWRR) when large cash flows occur during periods of significantly fluctuating portfolio values (just like the money-weighted rate of return).  This makes the Modified Dietz rate of return less ideal for benchmarking portfolio managers or strategies than the TWRR.  For example:

• When a large contribution is made prior to a period of relatively good (bad) performance, the Modified Dietz rate of return (ModDietz) will overstate (understate) a portfolio’s performance, relative to the time-weighted rate of return (TWRR).
• When a large withdrawal is made prior to a period of relatively good (bad) performance, the Modified Dietz rate of return (ModDietz) will understate (overstate) a portfolio’s performance, relative to the time-weighted rate of return (TWRR).

Using the values from our original example, we would plug in the appropriate numbers and calculate the rate of return for each investor.

Example:  Calculation of wi

Example:  Modified Dietz Rate of Return (MDRR) – Investor 1

Example:  Modified Dietz Rate of Return (MDRR) – Investor 2

Performance Results

 Methodology Investor 1 Investor 2 Time-Weighted Rate of Return (TWRR) 9.79% 9.79% Money-Weighted Rate of Return (MWRR) 8.98% 10.64% Modified Dietz Rate of Return (ModDietz) 8.97% 10.66%

As we can see in the chart above, the Modified Dietz rate of return is nearly identical to the money-weighted rate of return.  In my final blog post of the series, we will examine how calculating the Modified Dietz rate of return over monthly time periods can help an investor better estimate the time-weighted rate of return.

By | 2017-01-17T15:02:21+00:00 June 11th, 2015|Categories: Rates of Return|11 Comments

1. Ale March 8, 2018 at 2:58 pm - Reply

Hi Justin
I have the same question as Marcus
Is there a way to change the date of calculator?
Thanks

2. Ale March 7, 2018 at 10:36 pm - Reply

Hi Justin,
From what I understand Modified Dietz rate of Return gives you are better result than money-weighted rate return which fluctuates based inflow/outflow cash. As you mentioned in your previous paper Modified Dietz is closer to time-weighted rate return and I have downloaded the calculator for Modified Dietz. The calculator is for 2018 and is not allowing to change the dates for 2017; is there a way to change those dates?
Thanks

• Justin March 8, 2018 at 3:20 pm - Reply

@Ale: I’ll consider updating the calculator in the future to allow for the changing of dates.

3. Kyle January 7, 2018 at 1:45 am - Reply

The white paper you and Dan wrote is most helpful. Suppose the example investors in that document each had a USD account as well and they wanted to calculate the monthly modified Dietz return across both CAD and USD accounts in CAD. Is it as straight forward as gathering all 13 month end exchange rates as well as for each USD cashflow event, convert the USD V0, V1 and CF values to CAD and combining them with the respective values derived from the CAD account?

4. Andre Robichaud December 25, 2017 at 1:52 pm - Reply

Hi Justin,

Are you going to be posting a Modified Dietz calculator for 2018? or do you have one that we would be able to adjust dates. I found your calculator extremely helpful.
As is the information on your blog

Merry Christmas

Andre

• Justin December 27, 2017 at 1:51 pm - Reply

@Andre Robichaud: Merry Christmas to you and your family 🙂 I will be posting a downloadable 2018 version of the calculator sometime in January 2018.

5. Marcus November 10, 2017 at 10:05 am - Reply

Hi Justin, is there anyway to change the date on your calculator from 2017 to 2016? Thanks for the calculator by the way.

• Justin November 10, 2017 at 1:37 pm - Reply

@Marcus: I’ll send you an email with a version that you can adjust.

6. Deesha October 12, 2017 at 4:18 pm - Reply

Hi Justin, this is a great blog and it has helped me better understand performance figures! At the end of this blog, you have said your final blog will examine Modified Dietz over monthly time periods. Could you please provide me a link to this?

Kind regards,
Deesha