The Personal Rate of Return
The rates of return on your investments are calculated using a uniform industry-wide method known as the money-weighted rate of return or personalized rate of return (PRR).
How your rate of return is calculated
This method is used to establish the rate of return presented in your quarterly portfolio statements. It provides a clear understanding of how your investments have performed, as it takes into account transactions carried out over a given period.
The money-weighted rate of return or personalized rate of return (PRR) uses the following formula (see image).
For example
Let’s consider the following scenario:
- At the beginning of the year, you have $10,000 invested in a mutual fund.
- At the end of the first quarter, your assets amount to $9,800, for a quarterly return of -2%.
- At the end of the second quarter, your total is $9,506, for a quarterly return of -3%.
- At the end of the third quarter, you make a new deposit of $5,000, and your investment amounts to $14,031. Your return for the quarter is thus -5%, since you have realized a loss of $475 with respect to your starting balance.
- Finally, at the end of the fourth quarter, your assets total $15,434, for a quarterly return of +10%.
- According to the formula, your personalized rate of return (PRR) will be 3.9%.