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

  1. Is this a theoretically sound way to calculate performance?
  2. 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.)

  • $\begingroup$ Why don't you use IRR? $\endgroup$ – Neeraj Mar 5 '16 at 9:38

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