I do not quite understand the numerator of modified Dietz method, which is V1-(V0+sum(CFi)), where CFi are external cash flows occured in different time points. Why they can just be directly sum together, but not discount back to the PV first before adding?
Discount Rate is not known. We are trying to find out a rate earned through V0, CF, and V1. we don’t know what rate is earned on V0, on CF and what complex compounding effect of these two aggregated to V1. Sure if all the rates are known for discounting, you can do so you will get the same answer. However this is not mentioned in the text in this manner the way I explained to you, this is only my opinion based on what i understood from question raised by you.
However if you want to recall the formula:—
{What is your ending value (i.e. V1) - how much you have invested ( i.e.V0 + CF) } = the actual $ return u eraned
R= actual $ return/ Begining Value adjusted for CF
whereas
Begining Value adjusted for CF = Value which was there for whole return period (i.e V0) say 1 month + value which was there for specific period ( i.e CF ) say 20 days out of 30 days ( this 20 days out of 30 days are expressed as fraction multiplied by CF)
so, Begining Value adjusted for CF = V0+ 20/30 * CF.
I hope if this can help…
There is a question from my side any one who knows :-
Do we have to remember what is there in the every Standards of the GIPS or only information content. I mean Standards 1.A.7 contains Composites valuation dates, Standard 2.A.1 related to Total returns etc. Or only the information content is sufficient without regard to specific Standards like Composites valuation dates are the begning and ending valuation dates of calender year end and total return must be used so on and so forth.