The Modified Dietz Return Estimator: A Unified Framework for Portfolio Return Measurement

William C. Lindsey （ University of Southern California, Los Angeles, California ）

Robert Grados （ RTX Corporation, Los Angeles, California ）

Gita Govahi （ University of Southern California, Los Angeles, California ）

Abstract

This paper develops a rigorous and practically implementable framework for portfolio return measurement centered on the Modified Dietz Return estimator. While widely used in practice, the estimator is often introduced heuristically and lacks a unified theoretical treatment. We formalize its structure under general external cash flow conditions, establish its consistency properties, and clarify its interpretation as a discrete-time approximation to continuous-time return functionals. The analysis demonstrates that the Modified Dietz Return estimator arises naturally from first principles when returns are defined in the presence of intermediate flows. The resulting framework bridges standard industry practice with a more precise mathematical foundation, with direct implications for performance measurement, attribution, reporting standards, and fee-sensitive investment applications.

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