Portfolio Return Formula

Formula of Portfolio Return (Table of Contents)

• Formula
• Examples

What is the Portfolio Return Formula?

Portfolio return can be defined as the sum of the product of investment returns earned on the individual asset with the weight class of that individual asset in the entire portfolio. It represents a return on the portfolio and just not on an individual asset.

Expected return can be calculated with a product of potential outcomes (i.e. returns which is represented by r in below) by the weights of each asset in the portfolio (i.e. represented by w), and after that calculating the sum of those results.

Formula for Calculating Portfolio Return

Where  ∑ⁿ_i=1 w_i = 1

• w is the weight of each asset
• r is the return of an asset

Explanation of the Portfolio Return Formula

The formula for calculation of portfolio return is quite simple but requires little attention.

• Step 1: Get the individual asset return in which the funds have been invested in. For example, if an investor has invested in equity then one needs to calculate the entire return that is total return including the interim cash flows which in case of equities it would be a dividend.
• Step 2: Calculate the weights of the individual asset in which funds are invested. This can be done by dividing the invested amount of that asset by total fund invested.
• Step 3: Take the product of return that is calculated in step1 with weight which is calculated in step2.
• Step 4: The third step will be repeated until calculations of all the assets are completed. Then finally we need to add up product of all the individual asset return by its weight class which shall be the portfolio return.

Examples of Portfolio Return Formula (with Excel Template)

Let’s see some simple to advanced examples of Portfolio return formula to understand it better.

Portfolio Return Formula – Example #1

Consider ABC ltd an asset management company has invested in 2 different assets along with their return earned last year. You are required to earn a portfolio return.

Solution:

We are given the individual asset return and along with that investment amount, therefore first we will find out the weights as follows,

• Weight (Asset Class 1) = 1,00,000.00 / 1,50,000.00 =0.67

Similarly, we have calculated the weight of Asset Class 2

• Weight (Asset Class 1) = 50,000.00 / 1,50,000.00 =0.33

Now for the calculation of portfolio return, we need to multiply weights with the return of the asset and then we will sum up those returns.

• W_iR_i (Asset Class 1) = 0.67*10% =6.67%

similarly, we have calculated W_iR_i for Asset class 2

• W_iR_i (Asset Class 2) = 0.33*11%
• =3.67%

Calculation of portfolio return is as follows,

Portfolio Return

The portfolio return will be 10.33%

Portfolio Return Formula – Example #2

JP Morgan chase one of the largest investment banking firms has done several investments in various assets classes. Mr. Dimon the company chairman is interested in knowing the returns on the overall investment done by the firm. You are required to calculate the Portfolio Return.

Solution:

We are here only given the latest market value and there are no returns given directly. Hence, first, we need to calculate Return on individual assets.

We need to subtract the investment amount from market value to arrive at excess return and then dividing the same by investment amount will yield us returns on the individual asset.

Note: For detail Calculation please refer the excel template.

We now have the individual asset return and along with that investment amount and now we will find out the weights using investment amount and not the market value as follows,

Weight of Equities = 300000000 / 335600000 = 0.3966

Similarly, we have calculated the weight of all the other particulars.

Now for the calculation of portfolio return, we need to multiply weights with the return of the asset and then we will sum up those returns.

Calculation of portfolio return is as follows,

Portfolio Return

Hence the portfolio return earned by JP Morgan is 21.57%

Portfolio Return Formula – Example #3

Gautam is an individual who has recently started investing in the market. He has invested in XYZ stock for 100,000 and it has been a year and since then he has received a dividend of 5,000 and the current market value of XYZ stock is trading at a premium of 10%. Also, he has invested in fixed deposit for 20,000 and the Bank provides 7% return on it. And lastly, he has invested in land in his hometown for 500,000 and the current market value is 700,000. He has approached you to calculate portfolio return.

Solution:

We are here only given the latest market value and there are no returns given directly. Hence, first, we need to calculate Return on individual assets.

We need to subtract investment amount from market value to arrive at excess return and then dividing the same by investment amount will yield our returns on the individual asset.

Note: For detail Calculation please refer the excel template.

We now have the individual asset return and along with that investment amount and now we will find out the weights using investment amount and not the market value.

• Weight (XYZ Stock) = 1,00,000 / 6,20,000 = 0.1613

Similarly, we have calculated the weight for other particular as well.

Now for the calculation of portfolio return, we need to multiply weights with the return of the asset and then we will sum up those returns.

(XYZ Stock) W_iR_i = 0.15 * 0.1613 = 2.42%

Similarly, we calculated W_iR_i for other particular as well.

Calculation of portfolio return is as follows,

Portfolio Return

Hence the portfolio return earned by Mr. Gautam is 35.00%

Relevance and Use

It is crucial to understand the concept of portfolio’s expected return formula as the same will be used by those investors so that they can anticipate the gain or the loss that can happen on the funds that are invested by them. Based on that expected return formula an investor can make a decision as to invest in an asset given their probable returns.

Further, an investor will also be able to decide on the asset’s weight in a portfolio i.e. what proportion of the funds should be invested and then do the required change.

Also, an investor can make use of the expected return formula for ranking the individual asset and further eventually can invest the funds per the ranking and then finally include them in his portfolio. In other words, he would increase the weight of that asset class whose expected return is higher.

You can download this Portfolio Return Formula Excel Template from here – Portfolio Return Formula Excel Template

Recommended Articles

This has been a guide to Portfolio Return Formula. Here we discuss how to calculate Portfolio Return using its formula along with examples and downloadable excel template. You can learn more about financial analysis from the following articles –

• Real vs Nominal Interest Rates
• Definition of Financial Analysis
• Tools of Financial Analysis
• Formula for Rate of Return
• Formula for Required Rate of Return
• Formula for Real Rate of Return
• Formula of ROI