Pseudo-Naive Approaches to Investment Performance Measurement

This paper applies Magni's (2011) Aggregate Return On Investment (AROI)to investment performance measurement. We show that the ratio of undiscountednet cash flow to undiscounted invested capital is not a naive metric (itseemingly does not take the time value of money into account). It is a genuinelyinternal metric, capable of capturing an investment's economic pro fitability, aslong as it is compared with an appropriate cutoff rate which adequately takesaccount of the opportunity cost of capital. The not-so naive AROI is then extendedto several different capital bases; the result is that other well-known (allegedlynaive) metrics, such as cash multiple, undiscounted pro fitability, Modified Dietz and Simple Dietz return are given economic signi cance: each suchmetric is a (pseudo-naive) performance index that correctly expresses the investment'samount of return per unit of a specifi c capital: overall capital, initialinvestment, total cash outflow, average cash outflow)