When calculating the Capital Return, should you use the Market Value of only what was in the portfolio at Time 0, or should you use the market value of what would have been in the portfolio at Time 0? It seems by the wording to only use what was in the portfolio, but it causes some seriously distorted returns. Example: Lets say I invest $100 at the beginning of the year and buy a piece of real estate (initial capital). After 90% of the year (doing only annual returns, but applies for quarterly as well) goes by I contribute another $300 and invest in a separate property. At the end of the year the market value of my 2 properties totals $380. Although the properties depreciated, the return will show a positive capital return: Capital employed: $100 + 0.1*300 = $130 MV1 = $380 MV0 = $100 no capital expenditures or sales proceeds Rc: (380 - 100) / 130 = 215.4% Why on god’s earth would it should a huge positive return when the market value actually decreased???
I believe you should subtract contributed capital in the numerator. ($380-$100-$300)/($100+0.25*$300)=-$20/$175=-11.43%