In performance calculation, what is the 'Modified Dietz Method'?

[ A ]A tax evasion method banned by the Income Tax Department.

[ B ]A money-weighted return formula that approximates the true Time-Weighted Return by weighting each external cash inflow and outflow by the proportion of time it was held in the portfolio during the evaluation period.[ CORRECT ]

[ C ]A method of calculating building construction costs.

[ D ]A dietary nutritional program prescribed for corporate fund managers.

Takeaway

The Modified Dietz Method is a money-weighted return calculation that approximates the true Time-Weighted Return by weighting each cash inflow/outflow according to how long it was held in the portfolio during the measurement period.

Derivation

Computing a true Time-Weighted Return requires revaluing the portfolio at every single cash-flow date, which is data-intensive and often impractical for periodic (e.g., monthly) reporting. Modified Dietz offers a practical shortcut: instead of daily revaluation, it weights each external cash flow by the fraction of the period it remained invested (a deposit on day 1 of a 30-day month gets full weight, one on day 25 gets only 5/30 weight), producing a return figure that closely approximates true TWRR without needing daily NAV snapshots. This balance of accuracy and computational simplicity is why it remains a standard reporting method in portfolio performance measurement, and the exam tests recognition of its cash-flow-timing-weighting mechanism specifically.

Why the others fail

A — A tax evasion method banned by the Income Tax Department.

Modified Dietz is a standard, SEBI-recognized portfolio performance measurement technique used in financial reporting — it has no connection to tax evasion, which is unlawful conduct.

C — A method of calculating building construction costs.

Building construction cost estimation is a civil-engineering/real-estate costing discipline, entirely unrelated to weighting cash flows to compute portfolio investment performance.

D — A dietary nutritional program prescribed for corporate fund managers.

A dietary nutrition program is a health/wellness concept sharing only superficial name similarity ('Dietz') with the cash-flow-weighted portfolio performance calculation method.