Hello everyone!
I want to understand the portfolio turnover ratio a little better with respect to how it should be calculated. Now obviously the objective of the ratio for a certain period (usually measured annually) is to assess how often the manager/investor trades (buys and/or sells) the securities in their portfolio. A quick hit on the internet gives out the formula as minimum(Total buys, Total sells)/Average portfolio value. My questions here are two-fold. Logically speaking,
- Shouldn’t the numerator be an addition of total buys and sells?
- How are we accounting for cash inflows and outflows from the portfolio in the year?
It would be great to see if the readers here have modified this ratio in some way to suit their needs or prefer using something else entirely to measure the trading within a period.
Thanks for reading, would appreciate any help in understanding this better!
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