of return is commonly used for measuring the performance of private equity investments, because the principal partner (the investment manager) has greater control over the timing of cash flows, rather than the limited partner (the end investor). Simple Dietz method The Simple Dietz method applies a simple rate of interest principle, as opposed to the compounding principle underlying the internal rate of return method, and further assumes that flows occur at the midpoint within the time interval (or equivalently that they are distributed evenly throughout the time interval). However, the Simple Dietz method is unsuitable when such assumptions are invalid and will produce different results from those of other methods in such a case. The simple Dietz returns of two or more different constituent assets in a portfolio over the same period can be combined to derive the simple Dietz portfolio return, by taking the weighted average. The weights are the start value plus half the net inflow. Example 5 Applying the Simple Dietz method to the shares purchased in Example 4 (above): so which is noticeably lower than the 10% time-weighted return. Modified Dietz method The modified Dietz method is another method that, like the simple Dietz method, applies a simple rate of interest principle. Instead of comparing the gain in value (net of flows) with the initial value of the portfolio, it compares the net gain in value with average capital over the time interval. Average capital allows for the timing of each external flow. Since the difference between the modified Dietz method and the internal rate of return method is that the modified Dietz method is based on a simple rate of interest principle whereas the internal rate of return method applies a compounding principle, the two methods produce similar results over short time intervals, if the rates of return are low. Over longer time periods, with significant flows relative to the size of the portfolio, and where the returns are not low, then the differences are more significant. Like the simple Dietz method, the modified Dietz returns of two or more different constituent assets in a portfolio over the same period can be combined to derive the modified Dietz portfolio return, by taking the weighted average. The weight to be applied to the return on each asset in this case is the average capital of the asset. Example 6 Referring again to the scenario described in