Hi,
I’m trying to understand the IRR calculation of PP. Using following transactions, PP calculates different IRR values depending on the view you’re in.
5 = 2 /(1+IRR)^(486/731) + 8 /(1+IRR)^(731/365). with IRR = 45.32% and 486 and 731 the number of days from the buy transaction to dividend and to sell.
Can someone explain me these differences or point me to some relevant information?
Thanks.
@chirlu I’ve used several reporting periods. It seems that this only influences the key indicator from Reports > Performance and not the other metrics. Also, only the ending day of the period seems to be important. I don’t understand why.
You’re right about the dividend date. I’ve corrected it. The differences still remain. For a reporting period of “From 1 Jan 2020 until 1 Jan 2022” I get the following IRR measures:
There is no money in the security outside that period; only on the deposit account.
Apparently towards May (it’s still January in the attached file).
Generally a bad idea not to include the first day (2020-01-01). In this case, there is not much difference, but only because there is a quote of the security for 2020-01-01 that happens to coincide with the buying price.
Presumably correct (Excel: 2020-01-02 –5, 2022-01-01 +10). It’s a doubling over almost two years, so the annualized value is expected to be close to the square root of 2 (which is 1.4142…). If you extend the reporting period, it’s still a doubling, but over a longer period, so it will be less p.a.
Presumably correct, too; corresponding to what you gave to Excel.
If you want to turn the first result (for the whole portfolio) into this one, you need to withdraw the dividend and the sale proceeds immediately (same day).
Also presumably correct (Excel: 2020-01-01 –5, 2022-01-01 +8); trades do not respect the reporting period. Bought for 5, sold for 8, so +60%; then annualized, over slightly more than two years since 2020 was a leap year while PP always assumes 365 days to be a year when annualizing. I don’t know what Excel does about leap years, so small differences may be from that.
@chirlu Many thanks! I hope I understand it now. Do you think the following summary is correct?
Reports > Performance: the IRR is calculated for the whole project (all securities and all deposit accounts) and for the complete reporting period. If dividends are parked on a deposit account, they will contribute to the final result of the period. Only three numbers are important: initial value of portfolio, end value of portfolio and numbers of days between begin and end of reporting period.
Reports > Performance > Securities: the IRR is calculated per security from the start of the reporting period until the end. If the buy or sell transactions lay before the reporting period the corresponding historical quote is taken to determine the value. All transactions in the reporting period, including dividends, are evaluated at the transaction date (not the end date of the period).
Reports > Performance > Trades calculates the IRR per share without dividends or other income; from the first transaction (usually buy) until the last transaction (sell) or today. There is no reporting period.
I’ve tried to document the IRR function a little more in detail. If, you’re interested, you can find it at: IRR | hugsch
