The Simple Return is calculated by taking the absolute return over a period and dividing by the amount invested.
E.g. if a portfolio has £15,000 in it and makes an absolute return of £2,000 over a 1 year period then the Simple Return = £2,000 / £15 ,000 = 13.33%
Simple return does not account for when additional payments or withdrawals are made.
E.g. if in the example above an additional deposit of £40,000 was made half way through the year and the second half of the year returned £5,000, then the Simple Return = (£2,000 + £5,000) / (£15,000 + £40,000) = 12.72%
Here the return seems artificially low because the simple return assumes the additional deposit was part of the initial investment.
Time-Weighted Return separates returns into different sub periods to take away the effect of deposits and withdrawals at different times. Hence the name “time-weighted”.
E.g. using the example above the two periods would be broken down to £15,000 returning £2,000 and the £57,000 returning £5,000.
Time Weighted Return = ( (£2,000 / £15,000) +1 )* ( (£62,000-57,000 / £57,000) +1) – 1 = 23.27%
The Time-Weighted Return is a more accurate reflection of the overall performance of an investment portfolio because it is not distorted by the impact of payments and withdrawals. this make it much mire useful for comparing the performance of different portfolios.
Simple Return = (V1 – V0) / V0 = (Value at End – Value at Start) / Value at Start
Time Weighted Return is as follows:
Formula for each Sub-Period (SP1) = (V1 – V0 – D + W) / V0 = (Value at end – Value at start – Deposits + Withdrawals) / Value at start
Formula for whole period = [(SP1 + 1) * (SP2 + 1) * ….. (SPN +1)] -1