Question:
I have read the four threads on benchmark performance but none answers my question. When, in the last line of the benchmark portfolio for a particular portfiolio (e.g., Covered Calls), you state an amount for "Total Realized Gain/Loss" has that been taken out of the "Total Portfolio Value" or is that amount included in the value? In other words, looking at the 28 Oct newsletter, is the $78,565 Portfolio value for Agg. Covered Calls including the $17.169.66 or do you calculate the $17,169.66 as having been removed from the portfolio?
Solution:
The benchmark portfolio values include realized gains and unrealized losses; so the equation is: Portfolio value = Starting Capital + Realized Gains + Unrealized gains/Losses So if you start with a capital balance of $20k and have 2 positions; position A gives a realized gain of $1000 (closed out) and position B (still open) has unrealized losses of $500 then the portfolio value will be; $10000 + $1000 - $500 = $10500. The major difference is that realized gains are cash and are not affected by price fluctuations whereas the unrealized gains/losses will be. The only return worth bothering about is the realized return. Many investors are dillusioned by this fact, e.g. if you buy a stock at $10 and it rises to $15 many investors would say that they have 'made' a 50% return when in fact they have made no return until they sell the position and realize that gain, the inverse is true of losses.
[--- UPDATED: 5/11/2005 09:18:41 BY AGENT: Rob Camden ---]
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