Zestt

MathMan Wrote:
-------------------------------------------------------
>
> This is false...just look at the calculation. The
> div is a negative CF, withdrawl, you are clearly
> adding the dividend back. It is AS IF it is
> reinvested. What you do with it in reality
> doesn't matter.
>
> 1 + r = (V1 - CF)/V0 = (V1 + D)/V0


Actually MathMan... The dividend IS treated as a negative cash flow (as you correctly stated), which shows that it clearly IS being treated as a withdrawal (since it is no longer in the account).

I think you misunderstood what I was saying. I was speaking from a practical sense, explaining how the dividend is treated in an actual portfolio. If the dividend is NOT reinvested, it is treated as a withdrawal, since it is no longer included in the account value.

Using the formula you quoted:

1 + r = (V1+D)/V0

This is a formula you could use if the dividend was NOT reinvested. If it WAS reinvested, it would already be included in V1, so you would not need to add it back in. There is no explicit reinvestment assumption involved here. It doesn't matter whether or not a dividend is reinvested, as long as you account for it in the calculation (through the negative cash flow).



Edited 1 time(s). Last edit at Friday, June 24, 2011 at 10:08PM by McLeod81.