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Understanding your personal rate of return

The Personal Rate of Return (PROR) is designed to enable you to measure the performance of the overall investment in your account over a selected period of time. The method used to calculate your PROR is described below.

 

Methodology:

The returns are calculated daily, using a time-weighted formula. This method is considered as the industry standard by the Investment Funds Institute of Canada (IFIC). 

The formula for the Time-Weighted Rate of Return with a daily valuation is as follows:

R = MVE - 1
......MVB

Where: 

MVE is the market value of the account at the end of the current period, including any income distributions, but excluding any cash flows occurring in the period.

MVB is the market value of the account at the end of the previous period (or at the beginning of the current period), including any cash flows at the end of the previous period and any accrued income to the end of the previous period.

 

The linking formula is as follows:

Personal Rate of Return (PROR) = [(1+R1) x (1+R2) x …(1+Rn)-1] x 100

Where:

R1 = First period calculation
R2 = Second period calculation
Rn = Last period calculation

In order to convert the PROR to periods greater than 12 months, the Annual Compounded Rate of Return (ACRR) is calculated as follows:

ACRR = (RTotal365/n –1) x 100


Where:

RTotal = (1+R1) x (1+R2) x … (1+Rn)

n = Total days in period (total number of years times 365 days)

 

The following is a sample calculation based upon activity over a 3-month period from July 1 to September 30:

 

Sample Calculation

Step 1: Tally the transactions during the 3-month period

Investment X

 Date

 Purchase

 Redemptions

 $/unit

 Ending Balance

 July 1st  2,000 units   $12.00   2000 x 12 = $24,000.00
 August 18th  500 units    $13.00  2500 x 13 = $32,500.00
 September 20th      $14.00  2500 x 14 = $35,000.00
 September 30th      $13.00 2500 x 15 = $37,500.00 

Investment Y

 Date

 Purchase

 Redemptions

 $/unit

 Ending Balance

 

 Total Balance

 July 1st  1,000 units   $8.00   1000 x 8 = $8,000.00  $32,000.00
 August 18th  500 units  $9.00  1000 x 9 = $9,000.00  $41,500.00
 September 20th      $8.00  500 x 8 = $4,000.00  $39,000.00
 September 30th      $7.00 500 x 7 = $3,500.00   $41,000.00
                                        


Step 2
: Calculate return for each cash flow period.

R = MVE - (purchases - redemptions) - 1
MVB

R Aug. 18 = $41,500 – (500 x $13) – 1 = 0.09375
$32,000.00

R Sept. 20 = $39,000 + (500 x $8) – 1 = 0.03614
$41,500.00

R Sept. 30 = $41,000  – 1 = 0.05128
$39,000.00


Step 3: Calculate 3-month Personal Rate of Return as of September 30:

 

PROR = [(1 + RAug. 18) x (1+ RSept. 20) x (1+ RSept. 30) –1] x 100
PROR = [(1+ 0.09375) x (1 + 0.03614) x (1+ 0.05128) –1] x 100 = 19.1%

 

Hence, the PROR of this account is 19.1% for the 3-month period ending September 30.