Pseudo-Naive Approaches to Investment Performance Measurement
19 Pages Posted: 16 Dec 2014 Last revised: 1 Oct 2018
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 profitability, 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 profitability, Modified Dietz and Simple Dietz return are given economic signicance: each such metric is a (pseudo-naive) performance index that correctly expresses the investment's amount of return per unit of a specific 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: Suggested Citation