Pseudo-Naive Approaches to Investment Performance Measurement

19 Pages Posted: 16 Dec 2014 Last revised: 1 Oct 2018

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Date Written: September 9, 2014

Abstract

This paper applies Magni's (2011) Aggregate Return On Investment (AROI) to investment performance measurement. We show that the ratio of undiscounted net cash flow to undiscounted invested capital is not a naive metric (it seemingly does not take the time value of money into account). It is a genuinely internal metric, capable of capturing an investment's economic pro fitability, as long as it is compared with an appropriate cutoff rate which adequately takes account of the opportunity cost of capital. The not-so naive AROI is then extended to several different capital bases; the result is that other well-known (allegedly naive) metrics, such as cash multiple, undiscounted pro fitability, Modified Dietz and Simple Dietz return are given economic signi cance: each such metric is a (pseudo-naive) performance index that correctly expresses the investment's amount of return per unit of a specifi c capital: overall capital, initial investment, total cash outflow, average cash outflow).

Keywords: Finance, investment, performance measurement, rate of return, naive approach, Modified Dietz.

JEL Classification: G10, G11, G31, O16, D92, M41

Suggested Citation

Magni, Carlo Alberto, Pseudo-Naive Approaches to Investment Performance Measurement (September 9, 2014). Available at SSRN: https://ssrn.com/abstract=2538496 or http://dx.doi.org/10.2139/ssrn.2538496

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

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