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For any investors who are familiar with Excel or SQL, below you will find a technical summary of how we calculate the expected rate of return used in our Portfolio Manager.
(Note: Underlined text are functions (Excel and/or SQL)
Inputs
Inputs specific for Existing portfolio:
Inputs specific for New portfolio:
Interim calculations
CashFromExistingInvestments = PMT(ER/12; WeightedAverageOutstandingPeriod; -ExistingInvestment) * WeightedAverageOutstandingPeriod
Note: this assumes that the investment period is greater or equal to the weighted average outstanding period. As it might not always be the case, the following is used instead in the future value calculations:
CashFromExistingInvestmentsTilEndOfInvestmentPeriod = min(PMT(ER/12; NumberOfCompounds * InvestmentPeriod; -ExistingInvestment) * NumberOfCompounds * InvestmentPeriod; CashFromExistingInvestments)
MonthlyCashFromExistingInvestment = CashFromExistingInvestments / WeightedAverageOutstandingPeriod
MonthlyCashFromExistingInvestmentsTilEndOfInvestmentPeriod = MonthlyCashFromExistingInvestment
EMR = (1+ER)^(1/12)-1
Future value calculations (Note that these are calculated separately for pessimistic and optimistic scenario)
FutureValueOfPrincipal = InvestmentAmount * (1+EMR) ^ (NumberOfCompounds * InvestmentPeriod)
This is divided into two parts: during outstanding period and after outstanding period.
FutureValueOfMonthlyContributionsFromExistingPortfolio_OutstandingPeriod = MonthlyCashFromExistingInvestmentTilEndOfInvestmentPeriod *((1+EMR) ^ (Period)-1 / EMR)
Where Period = min(WeightedAverageOutstandingPeriod; NumberOfCompounds * InvestmentPeriod)
and
FutureValueOfMonthlyContributionsFromExistingPortfolio_AfterOutstandingPeriod =
FutureValueOfMonthlyContributionsFromExistingPortfolio_OutstandingPeriod *(1+EMR) ^ (max((InvestmentPeriod – WeightedAverageOutstandingPeriodYears) * NumberOfCompounds); 0)
FutureValueOfMonthlyDeposits = DepositPerMonth*(((1+EMR) ^ (NumberOfCompounds * InvestmentPeriod) -1)/EMR)
TotalFutureValue = FutureValueOfPrincipal + FutureValueOfMonthlyContributionsFromExistingPortfolio_OutstandingPeriod + FutureValueOfMonthlyContributionsFromExistingPortfolio_AfterOutstandingPeriod + FutureValueOfMonthlyDeposits
Profit calculation
NetProfit = TotalFutureValue - InvestmentAmount – MonthlyDeposits*InvestmentPeriod*12 – ExistingInvestment*PeriodCoefficient
where
PeriodCoefficient = min((InvestmentPeriod*12)/ WeightedAverageOutstandingPeriod; 1)