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However, I'm having a hard time figuring out the formulas. I guess I'm not approaching the calculations correctly. I looked at the 2002 numbers and taking the end balance less contributions/distributions throughout the year less the beginning balance, I come up with 25.97%.

It sounds like you understand the basic concept. We are basically trying to determine the change in portfolio value separate from additions to or withdrawals from the porfolio. However, you need to value the portfolio often in order to get an accurate reading. You wouldn't want to use just two valuations like 12/31/02 and 12/31/03.

As an extreme example, let's assume that you started with \$1,000 on 12/31/01, but you added \$1,000 on 1/1/02 and ended up with \$2,200 on 12/31/02. Using only two valuation dates, your return would appear to be 20%, because the formula essentially computes a \$200 return as a percentage of the \$1,000 invested. However, in reality, you had \$2,000 invested for pretty much the entire year, so your return should be about 10%, or a \$200 return on a \$2,000 investment.
`  Date        Value         Cash Inflow/ (Outflow)12/31/01      1,000.00                               -12/31/02      2,200.00                        1,000.00Return                                          20.00%`

`  Date        Value         Cash Inflow/ (Outflow)12/31/01      1,000.00                               -01/01/02      2,000.00                        1,000.0012/31/02      2,200.00                               -Return                                          10.00%`

If it is difficult to value the portfolio at each contribution and withdrawal, then try to value it at the end of each month at least. Your numbers will be much more accurate.

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