Pseudo-naïve approaches to investment performance measurement

Carlo Alberto Magni

Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: This paper makes use of Magni’s (2013. Insurance Mathematics and Economics, 53, 747-756) Average Interest Rate (AIR) in order to find a performance index which does not depend on the valuation rate (i.e., benchmark return). To this end, we distort the AIR by dropping the discount factors in the formula. The resulting modified AIR (MAIR) is the ratio of overall (undiscounted) return to overall (undiscounted) capital. While seemingly a na¨ive metric, we show that it is a genuinely internal metric, capable of capturing an investment’s economic profitability, as long as it is compared with an appropriate cutoff rate which adequately takes account of the opportunity cost of capital. The not-so na¨ive MAIR is then extended to several different capital bases; the result is that other well-known (allegedly na¨ive) metrics, such as cash multiple, undiscounted profitability, Modified Dietz and Simple Dietz return are given economic significance: each such metric is a (pseudo-na¨ive) performance index that correctly expresses the investment’s amount of return per unit of a specific capital: overall capital, initial investment, total cash outflow, average cash outflow).

Keywords: Finance; investment; performance measurement; rate of return; average interest rate; na¨ive approach; Modified Dietz (search for similar items in EconPapers)
JEL-codes: G31 M4 (search for similar items in EconPapers)
Pages: pages 23
Date: 2015-02
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://155.185.68.2/CefinPaper/CEFIN-WP51.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mod:wcefin:0051

Access Statistics for this paper

More papers in Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi" Contact information at EDIRC.
Bibliographic data for series maintained by Giuseppe Marotta ().