Question
Asked Mar 10, 2020
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In measuring the performance of a portfolio, the time-weighted rate of return is superior to the dollar-weighted rate of return because:
a. When the rate of return varies, the time-weighted return is higher.
b. The dollar-weighted return assumes all portfolio deposits are made on day 1.
c. The dollar-weighted return can only be estimated.
d. The time-weighted return is unaffected by the timing of portfolio contributions and withdrawals.

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Expert Answer

Step 1

Note we have two different type of measurement return of portfolio manager

  • Time weighted rate of return
  • Money weighted rate of return also called dollar weighted rate of return

Now if we talking about whom return is more better to measure the skills of portfolio manager than it is time weighted rate of return.

 

Step 2

Why TWRR is better

Firstly we consider how to calculate it

It is geometric mean of holding period return

On the other side MWRR is simply IRR and we know that IRR is affected by timing of cash flow

Since portfolio manager have differ amount each year to invest because of new fund added and p...

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