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The rate of return on a portfolio measures the percentage change in the value of a portfolio over a specific period, accounting for both capital gains and income from dividends or interest. It is a key metric for evaluating the performance of an investment portfolio. The rate of return can be calculated using various methods, such as the time-weighted or money-weighted return, depending on whether or not cash flows (e.g., deposits or withdrawals) are considered.
An investor’s portfolio grows from $100,000 to $110,000 in a year, resulting in a 10% rate of return, which includes capital appreciation and dividends.
• Measures the percentage change in portfolio value over a specific period.
• Includes both capital gains and income (dividends or interest).
• Can be calculated using time-weighted or money-weighted methods.
It allows investors to assess the performance of their portfolio and make decisions on rebalancing or changing strategies.
Time-weighted return ignores cash flows, focusing on the portfolio's performance, while money-weighted return accounts for cash inflows and outflows.
Factors include asset allocation, market performance, risk exposure, and the timing of cash flows into or out of the portfolio.
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