Time-Weighted and Money-Weighted Returns

Question 1

Money-Weighted return applies

Answer 1

the concept of the Internal Rate of Return (IRR) to investment portfolios

Question 2

An IRR is the..

Answer 2

Interest rate wat which a series of cash inflows and outflows sum to zero when discounted to their present value. That is, they have a Net Present Value (NPV) of zero.

Question 3

The beginning value of an account is an

Answer 3

Inflow, as are all deposits into the account

Question 4

All withdrawals from an account are

Answer 4

Outflows, as is the ending value

Question 5

Time-weighted rate of return measures

Answer 5

Compound growth and is the rate at which $1 compounds over a specified performance horizon.

Question 6

Time-weighting is the process of

Answer 6

Averaging a set of values over time

Question 7

The Time-Weighted rate of return is not affected by the timing of cash inflows and outflows. In the investment management industry, Time-Weighted Return is the preferred method of performance measurement because…

Answer 7

Portfolio managers typically do not control the timing of deposits and withdrawals from the accounts they manage

Question 8

The use of Time-Weighted rate of return removes distortions of lucky market timing and thus,

Answer 8

provides a better measure if a manager’s ability to select investments over the period.

Now if the manager has complete control over the money flows in and out of an account, the Money-Weighted Rate of Return would be THE more appropriate performance measure.