A Linkedin colleague sent me a note about the idea of calculating returns across weekends. There really is no need to do this, except when the month-end date occurs on the weekend and you’re accruing for income. The following paints four cases:

In Case #1, we calculate the return for each day, including the weekends, for the period Friday through Monday. In Case #2, we ignore the weekends, with the proviso that Monday’s beginning value is Friday’s ending value (just as Saturday’s is in Case #1): we get the same return.

In Case #3 we take accruals into consideration and calculate returns for each of the four days. In Case #4 we ignore the weekends, with the understanding that (a) Monday’s starting value is Friday’s ending, and (b) that Monday’s ending value includes the accruals that occurred over the weekend. We see we get the same returns.

If Saturday or Sunday is the start or end of the month, then we want to make sure we capture any accruals that would occur on Saturday and/or Sunday.

Ironically, I think systems that calculate monthly returns probably handle the month-end better than daily, since they inherently will ensure they capture all the accruals; for daily, unless you calculate every day, you need to do some extra work to make sure they’re there. Your thoughts? Am I missing something?