I am attempting to write a function that will calculate the annualized rate of return for individual dividends made by illiquid investments. These dividends are paid at varying intervals and the illiquid investment does not have an observable market price.
I have looked at using:
[(1 + YTD ROR)1/(#of days/365)] – 1
However, this does not seem valid if this dividend is one of many that have been made this year.
Below are 3 sample cases:
A Investment $10 / 1 unit 1/31/2011 - $0.11 div / 1 unit - 1.1% ROI - 4.4% annualized ROI 4/30/2011 - $0.08 div / 1 unit - 0.8% ROI - 3.2% annualized ROI 7/31/2011 - $0.10 div / 1 unit - 1.0% ROI - 4% annualized ROI
For investment A the assumption is being made that each dividend paid was being paid on a quarterly basis
B Investment $10 / 1 unit 1/31/2011 - $0.11 div / 1 unit - 1.1% ROI - 13.2% annualized ROI 2/27/2011 - $0.10 div / 1 unit - 1.0% ROI - 12% annualized ROI 3/30/2011 - $0.10 div / 1 unit - 1.0% ROI - 12% annualized ROI
For investment B the assumption is being made that each dividend paid would be paid monthly.
C Investment $10 / 1 unit 5/30/2011 - $2.00 / 1 unit - 20% ROI - 48.6% annualized ROI (assuming 365 days in a year) 6/30/2011 - $0.10 / 1 unit - 1.0% ROI - 12% Annualized ROI (assuming monthly dividend)
So the problems I'm coming across are:
- I won't always know what dividend schedule the current dividend is. For example, is this a monthly or quarterly dividend, or a special one time return of capital, etc.
- Sometimes more than 1 dividend is paid per year and sometimes not. Should extra weight be given to those that are the first to occur in that year (which effectively is what happens when using the formula at the top)?
All of this is to reconcile an investment's actual performance with its stated/projected performance. If in the prospectus it is estimated this investment will pay an 8% dividend each year, I need to quantify each paid dividend in annual terms to see if it meets, exceeds, or falls short of the projected performance.