# Which of these unrealized profit calculations is correct? And, why other calculations are wrong?

Which of these unrealized profit calculations is correct? And, why other calculations are wrong?

@ \$10 per unit,

• \$1000 - Subscription (100 units)
• \$0500 - Cash dividend (50 units)
• \$0500 - Reinvested dividend (50 units)
• \$0400 - Redemption (40 units)

Now NAV @ \$20 per unit, what's my unrealized profit? (1), or (2), or (3)?

(1) ignore realized amounts

``````Holdings * NAV - initial investment
>> 110 * 20 - 1000
>> \$1200, unrealized profit

(1200 / 1000) * 100 = 120%
``````

(2) include realized amounts

``````(1) + cash dividend + redemptions
>> \$1200 + 500 + 400
>> \$2100, unrealized profit

(2100 / 1000) * 100 = 210%
``````

(3) adjust realized amounts with subscription

``````Holdings * NAV - (initial investment - realized amounts)
>> 2200 - (1000 - (500 + 400))
>> \$2100, unrealized profit

(2100 / 100) * 100 = 2100 %
``````

All of the above are incorrect. The formula for unrealized gains is:

``````unrealized gains = current value - cost basis
``````

Your cost basis is the total amount of money you spent to acquire all the property you currently hold. (Cost basis accounting is an incredibly complicated issue; the above link might be a good place to start if you want to learn more about it.) If I understand your post correctly, you initially purchased 100 units at \$10/unit, then you purchased 50 units at \$10/unit, and finally you sold 40 of the above units.

Therefore you now own 110 units. Because they were all purchased at the same price the cost basis calculation is actually pretty easy, but let's go through it step by step anyway:

``````1. Buy 100 @ \$10.  Cost basis = 100*\$10 = \$1000
2. Buy  50 @ \$10.  Cost basis = 100*\$10 + 50*\$10 = \$1500
3. Sell 40 that were purchased at \$10.  Cost basis = 100*\$10 + 50*\$10 - 40*\$10 = \$1100
``````

Notice that in step (3) it doesn't matter what price you sold the 40 units for; it only matters what price you bought them at.

Now you can compute the unrealized gains using the formula at the top. The current value of the units you own is:

``````current value = 110 @ \$20 = \$2200
``````

``````unrealized gains = \$2200 - \$1100 = \$1100