Time & Money Weighted Return Que.

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delhirocks

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Which of the following statements regarding the money-weighted and time-weighted rates of return is least accurate?
A) The time-weighted rate of return reflects the compound rate of growth of one unit of currency over a stated measurement period.
B) The money-weighted rate of return removes the effects of the timing of additions and withdrawals to a portfolio.
C) The time-weighted rate of return is the standard in the investment management industry.
D) The money-weighted rate of return is the internal rate of return on a portfolio, taking into account all cash flows.
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A is correct.
D is correct.
B is correct.
C is incorrect. MWR = IRR – which is the standard in the investment management industry.
 
cpk, I believe that MWR takes into consideration timing of CF’s.
delhi, what’s the answer?
 
It should be B.. addition and withdrawls at the inappripriate time will skew/bias the money weighted return
- Dinesh S
 
i am getting confused…
originally thought B as well.
need to do a revision, and the sheer breadth of the amount to revise is driving me nuts..
 
Your answer: C was incorrect. The correct answer was B) The money-weighted rate of return removes the effects of the timing of additions and withdrawals to a portfolio.
The money-weighted return is actually highly sensitive to the timing and amount of withdrawals and additions to a portfolio. The time-weighted return removes the effects of timing and amount of withdrawals to a portfolio and reflects the compound rate of growth of $1 over a stated measurement period. Because the time-weighted rate of return removes the effects of timing, it is the standard in the investment management industry.
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I guess I have to go back and re-read the concepts, Initially I focused too much on the calculation aspect of these returns and not so much on what they signify.
 
MW is equivalent to IRR which takes timing of CF’s into account.
Answer is B.
 
MW = IRR, but isn’t IRR only the standard method when appraising capital investment decisions?
Doesn’t GIPS say somewhere that you must use time weighted returns for all discretionary fee paying accounts?
 
captial investment decisions yes, (well actually, NPV is the standard method), Investment performance, no. GIPS specifies TWR.
Consider this:
Q. An investor deposits £1,000 with an investment manager at Time 0. At time 1, the portfolio is worth £1,500, and the investor decides to invest a further £1,000. At a later time 2, the portfolio is worth £2,000. What is the performance of the portfolio?
A. **With any measurement of performance that is not a true time weighted rate of return, you will get the answer 0%*** MWR: -1000, -1000, 2000 gives 0, modified Dietz, whatever - Only a TWR takes into account the value of the portfolio at the time of the further investment.
TWR gives val1/val0 * val2/(val1+cf1) -1
=(1500/1000) * (2000/(1500+1000)) -1
= 1.5 * 0.8 -1
= 20%.
 
chrismaths wrote:captial investment decisions yes, (well actually, NPV is the standard method), Investment performance, no. GIPS specifies TWR. Consider this: Q. An investor deposits £1,000 with an investment manager at Time 0. At time 1, the portfolio is worth £1,500, and the investor decides to invest a further £1,000. At a later time 2, the portfolio is worth £2,000. What is the performance of the portfolio? A. **With any measurement of performance that is not a true time weighted rate of return, you will get the answer 0%*** MWR: -1000, -1000, 2000 gives 0, modified Dietz, whatever - Only a TWR takes into account the value of the portfolio at the time of the further investment. TWR gives val1/val0 * val2/(val1+cf1) -1 =(1500/1000) * (2000/(1500+1000)) -1 = 1.5 * 0.8 -1 = 20%.
Click to expand...
According to me, it should be (1+((1500-1000)/1500))*(1+(2000-(1500+1000))/(1500+1000))-1. =4/3*4/5-1 = 6.67%
What’s your take on this S2000magician or Exotichedge or anyone else?
 
From time 0 to time 1 the return is 50% (= £1,500 / £1,000 – 1).
From time 1 to time 2 the return is-20% (= £2,000 / £2,500 – 1).
The time-weighted return is 9.54% (= √(1.5 × 0.8) – 1).
blackjack21 wrote:
chrismaths wrote:captial investment decisions yes, (well actually, NPV is the standard method), Investment performance, no. GIPS specifies TWR. Consider this: Q. An investor deposits £1,000 with an investment manager at Time 0. At time 1, the portfolio is worth £1,500, and the investor decides to invest a further £1,000. At a later time 2, the portfolio is worth £2,000. What is the performance of the portfolio? A. **With any measurement of performance that is not a true time weighted rate of return, you will get the answer 0%*** MWR: -1000, -1000, 2000 gives 0, modified Dietz, whatever - Only a TWR takes into account the value of the portfolio at the time of the further investment. TWR gives val1/val0 * val2/(val1+cf1) -1 =(1500/1000) * (2000/(1500+1000)) -1 = 1.5 * 0.8 -1 = 20%.
Click to expand...
According to me, it should be (1+((1500-1000)/1500))*(1+(2000-(1500+1000))/(1500+1000))-1. =4/3*4/5-1 = 6.67%
What’s your take on this S2000magician or Exotichedge or anyone else?
Click to expand...
The highlighted number should be 1,000, not 1,500.
Be careful!
 
S2000magician wrote:
From time 0 to time 1 the return is 50% (= £1,500 / £1,000 – 1).
From time 1 to time 2 the return is-20% (= £2,000 / £2,500 – 1).
The time-weighted return is 9.54% (= √(1.5 × 0.8) – 1).
Click to expand...
Thank You.
blackjack21 wrote:
chrismaths wrote:captial investment decisions yes, (well actually, NPV is the standard method), Investment performance, no. GIPS specifies TWR. Consider this: Q. An investor deposits £1,000 with an investment manager at Time 0. At time 1, the portfolio is worth £1,500, and the investor decides to invest a further £1,000. At a later time 2, the portfolio is worth £2,000. What is the performance of the portfolio? A. **With any measurement of performance that is not a true time weighted rate of return, you will get the answer 0%*** MWR: -1000, -1000, 2000 gives 0, modified Dietz, whatever - Only a TWR takes into account the value of the portfolio at the time of the further investment. TWR gives val1/val0 * val2/(val1+cf1) -1 =(1500/1000) * (2000/(1500+1000)) -1 = 1.5 * 0.8 -1 = 20%.
Click to expand...
According to me, it should be (1+((1500-1000)/1500))*(1+(2000-(1500+1000))/(1500+1000))-1. =4/3*4/5-1 = 6.67%
What’s your take on this S2000magician or Exotichedge or anyone else?
Click to expand...
The highlighted number should be 1,000, not 1,500.
Be careful!
[/quote]
*facepalm*
How did I miss that? I will follow your approach so that I don’t commit these errors on the exam. I think I should stop thanking you now, because I can’t thank you enough for all the help that you’ve done. I feel so much confident compared to a few days back.
 
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