A friend of mine insists that that the following is a sound method to calculate the performance of a single holding in a portfolio, given that over time more capital has been allocated to that holding. My questions are these
- Is this a theoretically sound way to calculate performance?
- Is there a name for this?
The method is exemplified as follows with shares in a security being held. As additional shares are bought, their total return since purchase is calculated, weighted by the number of shares as a percentage of the total, and summed. No dates are used in the calculation.
Shares Price Return to Today Weight Return x Weight Original purchase 117 $260.91 177.82% 32.14% 57.16% Add 1 +37 $379.88 90.81% 10.16% 9.23% Add 2 +172 $541.33 33.90% 47.25% 16.02% Add 3 +38 $568.56 27.49% 10.44% 2.87% ------- Today 364 total $724.86 Sum: 85.28%
And thus my friend says it is most appropriate to say that the overall return of this holding, given the additional shares bought at a higher price, is 85.28%. He says a cost basis method, which implies a 66% return, is incorrect because it assumes all shares were bought at $438 at the same time. He also says that the total return since the original purchase (178%) is not representative because the shares purchased later did not return this much.
(I am afraid I posted a question earlier that lent itself more to discussion than an actual answer. I hope this is not considered duplicate posting.)