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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 %
3
+50

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

so your unrealized gains are:

unrealized gains = $2200 - $1100 = $1100
  • Thanks for your answer. Please elaborate a bit on these 3 points. 1. $500 in cost, is that reinvestment? 2. Redemption of $400, is that considered as cost? 3. No need to consider cash dividends?! – vi.su. Jun 6 '14 at 9:35
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    I have edited my answer to address these questions. Specifically ... 1. Yes. 2. No, redemption is not a cost; in fact it reduces your cost basis. 3. Dividends factor into realized gains, not unrealized gains. Please let me know if anything remains unclear. – dg99 Jun 6 '14 at 15:30
  • thanks for the detailed answer. Sorry, if my question was confusing. 50 unit is not a buy, but it was cash dividend paid to me ($500), for holding the units. Cash dividends are paid as 'cash'. I mentioned cash dividend units, which was calculated as, (cash paid / NAV at the time of payment). – vi.su. Jun 8 '14 at 1:30

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