Time weighted

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babycakes

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The time-weighted rate of return is calculated by computing the quarterly holding period returns and linking those returns into an annual return. In this case, the quarterly holding periods are 2.4/2.2 = 1.0909, 2.6/2.8 = 0.9286, 3.2/2.4 = 1.3333, and 4.1/4.2 = 0.9762. The time-weighted return is thus (1.0909 � 0.9286 � 1.3333 � 0.9762) - 1 = 1.3185 � 1 = 0.3185 or 31.85%.



why dont they take it to the power of 1/4???
 
I answered this in some other thread.

The time weighted return is stated yearly and not quarterly. Thats why.

So if my HPY for 7 months is 6% and the remaining 5 months is 5% , my annual return is
1.06 x 1.05 -1 = 11.3%

Now if these returns are stated semi- annually, you have to do treat them as 2 6 month periods.

1.0909 � 0.9286 1.30 %
1.3333 � 0.9762 30.16 %

Time weighted 6 month return = 1.0130 * 1.3016 raise to 1/2 -1 = 14.83 %

General rule is you got to see what period you need the compounded return for.

If I want time weighted return for 1.5 years, I need to multiply my 1 year return with the next 6 month return.
 
Sorry guys but can you guys please elaborate on that? I mean why didn't we do the ^1/4???

if its stated yearly we don't needed??? so when do we needed?

Thanks in advance
 
you will need to do 1/4 if they had asked for the time-weighted quarterly return given the returns of the 4 quarters.
 
so because they asked for the yearly return we don't have to do the 1/4? so if they ask for semiannual return we do 1/2 but if they ask for yearly we just multiplied?
 
it's really not as bad as it looks...

Basically, you raise the product to: x/y, where:
x = number of periods over which we want the time-weighted return over
y = sum of periods covered by the component returns

much easier to explain with actual numbers. So taking the original example:
x = 12 months (coz we want the annual time-weighted return)
y = 12 months (4 quarters)

so you raise it by 12/12 = 1.

if we wanted to calculate the ANNUALIZED time-weighted return, given returns from SIX quarters:
x = 12 (coz, annual)
y = 18 (6 quarters)

so, we'd raise the product by: 12/18 = 0.67
 
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