Almost every investment portfolio aims to maximize overall returns — it’s what investors choose to do with those returns that will vary from person to person. With that being said, the best way to ensure you are building a successful portfolio is through consistent evaluation. The key to this practice can be found by learning how to calculate portfolio return.
The formula for portfolio return can help investors estimate their annual gains and compare the performance of different assets. This is an invaluable skill, no matter where you are in your investing career. Keep reading to learn more about how to calculate portfolio return and start practicing today.
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What Is Portfolio Return?
Portfolio return is the gain or loss from an investment portfolio, typically made up of multiple asset types. Investors will choose assets based on their financial goals and risk tolerance and attempt to maximize their overall returns. The purpose of looking at portfolio return is to ensure a balanced, high-yielding investment portfolio. Sample assets include stocks, bonds, ETFs, real estate, and more.
Specific benchmarks are used when looking at portfolio return, depending on the included assets. Most investors will calculate their portfolio returns annually to ensure they are meeting their financial goals. When analyzing portfolio returns, a common strategy is to choose investment types that move in opposite directions, such as stocks and bonds. This is one way to use portfolio return to balance your investments and reduce overall risk. There are numerous other ways to use this calculation to your benefit.
Portfolio Return Formula
The portfolio return formula might take you back to math class, but don’t let that intimidate you. With a little practice, portfolio return is a lot easier to work with than you might think. Here is the portfolio return formula:
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W: The weight of each asset, or the amount of your portfolio that asset makes up.
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R: This stands for the return of an individual asset, which can be calculated depending on the asset type.
How To Calculate Portfolio Return
You can solve the formula for portfolio returns with simple addition — but only after determining a few things about each asset type. Essentially, investors will need to calculate the weight and return of each asset in their portfolios. I recommend starting this process in a spreadsheet to organize the asset types and simplify the required math. When you are ready to start, the following steps can be used to calculate portfolio return:
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Start by determining the returns of each asset type. You can use investment returns from a weekly, monthly, or annual basis — remember to be consistent across assets.
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Next determine the weight of each investment type. To do this, take the amount you invested in that asset and divide it by the total amount invested in the portfolio. Repeat this formula for each asset type to get each investment weight.
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For each asset type, multiply the number of returns by the portfolio weight. This step is illustrated by looking at “ wi ri” in the formula.
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Once you have this number for each asset type, add the percentages together to get the overall portfolio return.
Example Of How To Calculate Portfolio Return
The best way to learn how to calculate portfolio return is by looking at an example. Johnny’s portfolio has three asset types: real estate, stocks, and bonds. The total investment amount for his portfolio is $750,000. In Johnny’s portfolio, the annual returns are: real estate 10%, stocks 8%, and bonds 2%.
Our next step is to compare each asset type’s initial investment to the overall investment amount of the portfolio. For real estate, Johnny invested $425,000. If we divide 425,000 by 750,000 we get .56. Next are stocks, which have an initial investment amount of $275,000. The weight of this asset type can be solved by (275,000 / 750,000). This gives us .36. Finally, Johnny invested $50,000 in bonds, which has a weight of about .06 in his portfolio.
Now that we have the return and weight of each investment, we need to multiply these numbers. For real estate, we will multiply .56 by 10% to get 5.6%. Following this formula for stocks and bonds, we get 2.88% and .12%, respectively. If you add each of these percentages together, the overall portfolio return is 8.6%.
For this example, we knew the exact return amounts for each investment type — but in reality, you may not always have these numbers before you start. Keep reading to learn more about how to calculate returns for all of your investments.
How To Calculate Expected Return
Before you can calculate the expected return on your overall portfolio, you’ll need to know the expected return on each asset held in the portfolio. You’ll also need to know how much weight each asset holds. Then, you’ll add up the weighted averages of each asset’s anticipated rate of return (RoR).
Once you know the expected return and weight of each asset held in your portfolio, you can multiply the expected return of each asset by its weight. Finally, you’ll add up the product of each asset to calculate the total expected return of your portfolio overall.
Expected Return Formula
Here is the expected return formula, with the scenario that your portfolio holds three assets. The equation is as follows:
WA = Weight of asset A
RA = Expected return of asset A
WB = Weight of asset B
RB = Expected return of asset B
WC = Weight of asset C
RC = Expected return of asset C
Limits Of Expected Return
Calculating the expected return of an asset may take some guesswork. This is because the expected return is calculated using historical data, and because the market fluctuates, it only paints a possible picture, rather than a precise picture. Investors should use this formula while keeping in mind that it may not paint the whole picture.
Standard Deviation Of A Portfolio
Standard deviation can be used to assess the overall risk associated with an asset or portfolio. If you have prior experience with statistics, you may be familiar with the calculation process. Essentially, standard deviation can be calculated using the rate of return, portfolio weight, variance, and covariance between assets. If the resulting number is high, the risk associated with the portfolio is somewhat high. If the standard deviation is low, investors can expect more predictable performance. Standard deviation is not always effective, however, and should be used with caution when assessing overall risk. If you are interested in learning more about how to calculate standard deviation, read the formula provided by Investopedia.
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How To Calculate Portfolio Return For All Your Investments
The only way to accurately calculate your portfolio return is to understand the performance of each individual asset. Unfortunately, returns can be impacted by economic changes, political events, market fluctuations, and more. Each of these components makes it challenging to determine your annual returns by asset, but you can figure it out with the right amount of data and patience. Before getting started, there a few factors that can influence your overall portfolio return to be aware of:
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Net asset value
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Holding period return
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Cash flow adjustments
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Annualized returns
Net Asset Value
Net asset value (NAV) is the value of an asset minus the total cost of its liabilities. NAV is most commonly used when analyzing mutual funds or ETFs. The NAV formula will break down the per-share value of an asset at a specific point in time. Some investors will compare NAV across time periods to help analyze a specific asset, but this formula can also help as you attempt to calculate portfolio return. Identify a period you want to calculate for and use NAV to estimate the value of your investments.
Holding Period Return
Holding period return (HPR) is one of the simplest methods for calculating investment returns. It builds on NAV and takes income from interest or dividends into account. The HPR formula is as follows:
Cash Flow Adjustment
It is important to adjust for the amount of cash flow generated by each investment type when determining returns. Adjusting cash flow will result in more accurate calculations, and ultimately a more accurate look at your portfolio returns. For example, if you added funds to an investment in your portfolio mid-period, the cash flow may be skewed for that asset. A common method used to adjust cash flow is through the modified Dietz method, explained here by Investopedia. For our portfolio return calculator, it is important to note any changes in cash flow to your investment types and adjust returns accordingly.
Annualized Returns
While the HPR formula is a great tool for comparing investments made over different periods, annualizing returns can take this process one step further. Annualized returns illustrate the average return of an investment over an entire year. This practice helps investors compare investments more easily by giving the return amounts a common denominator, in this case, one year.
How Do You Calculate Portfolio Return in Excel?
You’ll quickly learn that Excel or Google Sheets can be your best friend when running complex real estate calculations. You can even set up a formula template and save it so that you can run calculations again and again without having to reinvent the wheel. The key to using Excel is to set up data labels clearly so that you know exactly where to input your variables each time you run your calculations.
To get started, let’s set up your variable labels in the top row. Starting in cell A1, enter the following labels: Portfolio Value, Name, Investment Value, Investment Return, Investment Weight, Total Expected Return. The last cell in which you entered “Total Expected Return” should be F1.
Next, you’ll enter your variables (values) in the second row, starting in A2. Here, add in the values that correspond with the respective label in the cell above. So for example, in cell A2, you would enter your portfolio’s total current value. In cell B2 and below, enter the names of each investment in your portfolio. In cell C2 and below, enter the current value of each individual investment in your portfolio. In cell D2 and below, enter your expected investment return rates for each investment.
Once you’ve inputted the data that you have at hand, it’s time to start making some calculations. The first calculation you’ll make is the portfolio weight of each of your investments. These numbers will be computed in column E, under your label “Investment Weight.” Starting in cell E2, enter the formula “=(C2/A2)”. Entering this formula will calculate the weight of the investment you placed in row 2. You can repeat this process for each investment, always dividing by the value entered in cell A2.
Finally, it’s time to calculate your total expected return. In cell F2, under the label “Total Expected Return,” enter the formula “=([D2*E2]+[D3*E3]+…)”. Be sure to include each investment you have. The rendered number should be your total portfolio return.
Here is an example to help illustrate how this calculation using Excel should work.
Example Of Portfolio Return In Excel
Let’s say that you currently own three investments that are currently valued at $50,000 total. Their names are Meow, Woof, and Tweet, and are valued at $10,000, $25,000, and $15,000 respectively. Their individual rates of return are 3.5%, 4.6%, and 7%. This is data that you should already have.
First, set up your spreadsheet by entering your data labels in Row 1 as instructed above.
Second, enter your given data. Under Portfolio Value, in cell A2, enter your total portfolio value of $50,000. Next, in column B, enter your investment names: Meow, Woof, and Tweet (rows B2 through B4.) Enter the value of each respective investment in cells C2 through C4, and then the respective rates of return in column D, rows 2 through 4.
Once you’ve entered your given data, you can start computing your investment weights. Start in cell E2. Enter the formula, “=C2/A2”. This is instructing Excel to divide the investment value of Meow ($10,000) by your total portfolio value ($50,000). The resulting investment weight should be 0.2. Repeat this process for Woof and Tweet.
Finally, compute your total portfolio return in Column F. Enter the formula “=([D2*E2]+[D3*E3]+[D4*E4])”. This is taking the weighted return of each of your investments and adding them up to find your portfolio return. In this example, the resulting number should be 0.051. In other words, the total return rate of your portfolio, with all investments combined, is 5.1%. This means that in one year, your $50,000 portfolio will be valued at $52,550.
How To Use Portfolio Return
Portfolio return is a great tool when analyzing the potential gains or loss to be incurred by a new investment. For example, investors can apply the expected return formula to get a better idea of how an investment may perform within an existing portfolio. Additionally, portfolio return can provide a closer look at the potential weight of an asset within a given portfolio. Investors can use their existing portfolio, along with projections from the new opportunity, to get a better idea of the proportion of funds distributed to each investment. This can help as you balance your portfolio.
Summary
There are numerous ways to evaluate your performance as an investor, but perhaps none is more revealing than looking at your overall portfolio return. This formula considers the weight and returns of each investment to provide a comprehensive look at the value of your portfolio. Not only can this be used to compare investment types, but it can also be used to reevaluate your overall investment strategy and identify areas for opportunity. That being said, learning how to calculate portfolio return is a crucial skill for investors of all experience levels. Practice with the above example and let us know if we left anything out.
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