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 w_{i}**

**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.

KyleJanuary 7, 2018 at 1:45 amThe 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?

JustinJanuary 7, 2018 at 10:04 pm@Kyle: You got it! 😉

Andre RobichaudDecember 25, 2017 at 1:52 pmHi 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

JustinDecember 27, 2017 at 1:51 pm@Andre Robichaud: Merry Christmas to you and your family 🙂 I will be posting a downloadable 2018 version of the calculator sometime in January 2018.

MarcusNovember 10, 2017 at 10:05 amHi Justin, is there anyway to change the date on your calculator from 2017 to 2016? Thanks for the calculator by the way.

JustinNovember 10, 2017 at 1:37 pm@Marcus: I’ll send you an email with a version that you can adjust.

DeeshaOctober 12, 2017 at 4:18 pmHi 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

JustinOctober 12, 2017 at 4:25 pm@Deesha: I’m glad you’ve enjoyed the articles. Here’s a link to the Modified Dietz article, our white paper on calculating rates of return, and a downloadable Modified Dietz calculator:

https://www.canadianportfoliomanagerblog.com/how-to-calculate-your-modified-dietz-rate-of-return/

https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2015-07-10_PWL_Bender-Bortolotti_Understanding-your-portfolio-s-rate-of-return_Hyperlinked.pdf?ext=.pdf

http://www.canadianportfoliomanagerblog.com/calculators/