How to Calculate Dollar-Weighted Investment Returns

by C. Taylor ; Updated April 19, 2017

Two methods exist for calculating return on investment (ROI): time-weighted and dollar-weighted. Time-weighted ROI calculates returns based on time and disregards cash flow into and out of an account. This method is preferred for assessing a broker's ability to manage investments because it excludes an individual's deposits or withdrawals that the broker has no control over. In contrast, dollar-weighted ROI calculates returns on each dollar entered into the account. This calculation is slightly more difficult, because you have to analyze each deposit or withdrawal made.

Step 1

View your account statement and separate the investment into periods that end just before a non-interest deposit or withdrawal. As an example, you may have a starting balance of $8,000, deposit $2,000 more 3 months later, withdraw $1,000 the next month and end up with $12,000 4 months later. You would have 3 periods: From the beginning to the first deposit, from the deposit to the withdrawal, and from the withdrawal to the last date.

Step 2

Write out the starting and ending balances for each period, but don't include the deposit or withdrawal that occurs after the end of the period. In the example, Period 1 started at $8,000 and may have grown to $9,500, just before the deposit. Period 2 starts at $11,500 because you deposited $2,000, and may have grown to $13,000. Period 3 starts at $12,000, after the $1,000 withdrawal, but does not grow any further, so it ends at $12,000.

Step 3

Divide each period's ending balance by the starting balance. In the example, you would divide Period 1's $9,500 ending balance by $8,000 to calculate a growth factor of 1.1875. Likewise, Period 2 has a growth factor of 1.1304. Period 3 has a stale growth factor of 1.00.

Step 4

Multiply each period's growth factor to calculate the overall dollar-weighted growth factor. In the example, 1.1875 times 1.1304 times 1.00 gives you 1.3424.

Step 5

Subtract 1 to calculate the dollar-weighted ROI. In the example, you would have a dollar-weighted ROI of 0.3424, or 34.24 percent.