As financial market volatility reaches historically high levels and a global recession fans the flames of fear, investors are transferring money among investment funds or withdrawing money from their investment portfolios altogether. In a monthly series, Stephen M. Horan explains how volatility and funds flow affect portfolio performance measures.

Aren’t return calculations straightforward?
Performance is simply measured as the change in a portfolio’s value relative to its initial market value when there are no external cash flows (such as contributions or withdrawals) into the portfolio. An equity portfolio that begins 2008 with €1m (£898,000, $1.3m) and experiences a severe €450,000 loss, for example, has a -45 per cent return.