How Do You Calculate Weighted Average Dollar Return

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Calculating Weighted Average Dollar Return: A Comprehensive Guide

Investors seeking to measure the performance of their investments often utilize the weighted average dollar return (WADR) calculation. This metric provides a comprehensive evaluation of an investment’s overall profitability, considering both capital appreciation and reinvested dividends or interest. Understanding how to calculate WADR empowers investors to make informed investment decisions and assess the effectiveness of their portfolio strategies.

Weighted Average Dollar Return Formula:

The weighted average dollar return (WADR) is calculated using the following formula:

WADR = [(Ending Investment Value – Beginning Investment Value) / Beginning Investment Value] x 100

  • Ending Investment Value: The value of the investment at the end of the period under consideration.
  • Beginning Investment Value: The value of the investment at the beginning of the period under consideration.

Step-by-Step Process for Calculating WADR:

  1. Determine the Beginning Investment Value: Start by identifying the initial value of your investment at the beginning of the period you want to analyze.
  2. Calculate the Ending Investment Value: Determine the total value of your investment at the end of the period. This includes any capital appreciation, dividends received, or interest earned.
  3. Subtract Beginning Investment Value: Subtract the beginning investment value from the ending investment value to find the net change in your investment’s value.
  4. Divide by Beginning Investment Value: Divide the net change in value by the beginning investment value. This gives you the percentage change in your investment.
  5. Multiply by 100: Multiply the percentage change by 100 to convert it into a percentage return.

Example of Calculating WADR:

Consider an investor who invests $10,000 in a stock at the beginning of the year. During the year, the stock appreciates by 10%, and the investor receives $100 in dividends. At the end of the year, the stock is worth $11,100.

  • Ending Investment Value: $11,100
  • Beginning Investment Value: $10,000

Using the WADR formula:

WADR = [($11,100 – $10,000) / $10,000] x 100

WADR = [1,100 / 10,000] x 100

WADR = 0.11 x 100

WADR = 11%

Therefore, the weighted average dollar return for this investment is 11%.

Conclusion:

Calculating weighted average dollar return is a valuable tool for investors to assess the overall performance of their investments. By considering both capital appreciation and reinvested income, WADR provides a comprehensive measure of investment profitability. Understanding the formula and calculation process empowers investors to make informed investment decisions and evaluate the effectiveness of their portfolio strategies.

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