The good thing about investment performance measurement is that it works across asset classes and strategies. It can be used for fixed income securities as much as it can be used for equities or mutual funds.
Investment performance measurement begins with the valuation of the assets within a portfolio. But as an investor, investing through a fund manager, the responsibility of valuing the assets within your portfolio shifts to the fund manager. For the “do it yourself” (DIY) investor, the valuation of the asset within your portfolio will derive from the market prices of those assets.
For example, if you have a portfolio that holds 100 shares of Access Bank, 250 shares of Dangote Cement and 50 shares of Nestle, the value of your portfolio will be the sum (sum-product) of the number of shares in each equity multiplied by the price as at the date of the valuation.
What is Return and how is it calculated
The starting point for performance measurement is the calculation of return. Return is the benefit you received from an investment over a period of time. Return or gain is the difference between the current value of your investment and the original investment or the value as at the last calculation period.
Gain or Loss= Current Value-Investment Made
Effects of Cashflows
It is not only the reinvestment of dividends or interests that complicate the calculation of investment performance or rate of return. It even gets further more complex and complicated when you have additional investments or subscriptions and when you partially redeem or sale some of your investments. In investment performance measurement, those activities are called cashflows.
So, the cashflows affect investment performance measurement because you need to account for them, not only due to their numerical effect but also due to their timing effect. The effect of a redemption done at the beginning of the month differs from the effect of such redemption done in the middle of the month for investment performance measurement purposes.