occur. II Calculate the interim rate of return for the subperiod according to equation (17B.1). II Link the subperiod returns to get the return for the entire period. In equity markets, the primary drivers of performance include the shares held of each asset and its market price as well as accrued income from dividends. Dividends ex-not-paid affect a stock's price whereas cash dividends on the pay date do not. When cash flows occur, there are two proposed methods for measuring a portfolio's return. The first is a dollar-weighted return and the second is a time-weighted return. DOLLAR-WEIGHTED RETURN__________________________ There are two methods for computing a do liar-weighted return. The first is the internal rate of return and the second is the modified Dietz method. To compute the internal rate of return of a portfolio we assume that the portfolio has I (I = 1, . . . , I) cash flows over some period (e.g., one day, one month, one quarter) and solve for the internal rate of return, IRRATE, such that the following relationship holds I _ MVE = ^FLOWix(l + IRRATEif< (17B.2) <=i where FLOW = ith cash flow over the return period, in the form of either a deposit (cash or security) or a withdrawal w = Proportion of the total number of days in period that FLOW has been in (or out of) portfolio. The formula for w: assuming cash flows occur at end of day, is (CD-D,., CD where CD = Total number of days in return period D: = Number of days since beginning of period when the flow, FLOWt> occurred Equation (17B.2) is also known as the modified Bank Administration Institute method (modified BAI). It is an acceptable approximation to the time-weighted return (discussed in the next section) when the results are calculated at least quarterly and geometrically linked over time. A portfolio's return based on the Modified Dietz method is given by _MVE-MVB-F (17B.3) DieK~ MVB + FW where F = Sum of cash flows within period FW = Sum of cash flows each multiplied by its weight J /XW; i.e., FW = ^FLOW;