- CFA Exams
- 2025 Level I
- Topic 1. Quantitative Methods
- Learning Module 1. Rates and Returns
- Subject 3. Money-Weighted and Time-Weighted Return
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Subject 3. Money-Weighted and Time-Weighted Return PDF Download
In investment analysis, the money-weighted rate of return (MWRR) and time-weighted rate of return (TWRR) are two commonly used measures to evaluate the performance of portfolios.
Money-Weighted Rate of Return
The MWRR takes into account the timing and magnitude of cash flows within a portfolio. It represents the internal rate of return (IRR) that equates the present value of all cash flows (contributions and withdrawals) to the portfolio's ending value. MWRR is investor-specific and reflects the actual return experienced by the investor.
If funds are added to a portfolio when the portfolio is performing well (poorly), the money-weighted rate of return will be inflated (depressed).
Time-Weighted Rate of Return
TWRR measures the compound growth rate of an investment over a specified period, irrespective of the timing and amount of cash flows. It is often used to assess the performance of investment managers or compare different portfolios.
The TWRR measures the compound growth rate of $1 initial investment over the measurement period. It eliminates the impact of cash flows by assuming that the portfolio's value is reset to its beginning value at each cash flow. Time-weighted means that returns are averaged over time. TWRR measures the compound growth rate of an investment over a specified period, irrespective of the timing and amount of cash flows. It is often used to assess the performance of investment managers or compare different portfolios. It is the preferred method of performance measurement.
Example
Jayson bought a share of IBM stock for $100 on December 31, 2020. On December 31, 2021, he bought another share for $150. On December 31, 2022, he sold both shares for $140 each. The stock paid a dividend of $10 per share at the end of each year.
To calculate the dollar-weighted rate of return, you need to determine the timing and amount of cash flows for each year, and then set the present value of net cash flows to be 0: - 100 - 140/(1 + r) + 300/(1 + r)2 = 0. You can use the IRR function on a financial calculator to solve for r to get the dollar-weighted rate of return: r = 17%.
To calculate the time-weighted rate of return:
- Split the overall measurement period into equal sub-periods on the dates of cash flows.
For the first year:
-- beginning price: $100
-- dividends: $10
-- ending price: $150
- For the second year:
-- beginning price: $300 (150 x 2)
-- dividends: $20 (10 x 2)
-- ending price: $280 (140 x 2)
Calculate the holding period return (HPR) on the portfolio for each sub-period: HPR = (Dividends + Ending Price)/Beginning Price - 1. For the first year, HPR1: (150 + 10)/100 - 1 = 0.60. For the second year, HPR2: (280 + 20)/300 - 1 = 0.
Calculate the time-weighted rate of return:
- If the measurement period < 1 year, compound holding period returns to get an annualized rate of return for the year.
- If the measurement period > 1 year, take the geometric mean of the annual returns.
User Contributed Comments 34
| User | Comment |
|---|---|
| synner | how do you use IRR function on a TI BAII plus? |
| jimmymh | IRR is a function of CF, input your CF then Push IRR then compute. |
| rche | Can anyone tell me the exact key stroke to solve for the 17% in the IBM example using the BA II Plus? |
| Evgenia1 | CF C01=-100 F01=1 C02=-140 F02=1 C03=300 IRR CPT Result: 16.82 |
| yly13 | shouldn't it be -100-150/(1+r)+300/(1+r)2 |
| HBomb | yly13 There is a $10 Dividend after the first year also which you add to the $-150. This gives you $-140 instead. |
| KenSemer | How do you compute the Time Weighted Rate of Return using BA II Plus? |
| clyde | Hi, Can anyone tell me for Time-Weighted, in 2nd yr, the beginning price is 300(150x2)? Yr1 has ending $150. Where does the other 150 come from. Many thanks |
| akanimo | clyde, jayson bought a second IBM share at the end of the year which combines with the initial purchase to give 2 shares, both the new share and the old share will be valued at this same new price i.e. 150 x 2 |
| sdivietr | how do I calculate the Time wrr if period < 1 year? Compounding of individual HPR means????? |
| Taimoor | If the return Time Weighted Rate of Return is less than 1 year the compounded annual return is calculated as follows: e.g a weekly return of 0.2% (1.002)^52 - 1 = 0.1095 or 10.95% note: 52 is used as a power because the return is weekly and their are 52 weeks in a year. |
| achu | Geometric Mean formula used with TIME wtd returns, the preferred measure of performance! |
| HaTran | What is different betweent money - weighted and dollar - weighted rates of return??? |
| vinnybozz | Dollar Weighted Solution is: t=0 first purchase: -100 t=1 dividend on 1st share: +10 2nd purchase: -150 t=2 dividend on 2 shares: +20 (10+10) sale: +280 (140*2) So at t=0, Solve r: -100 + (+10-150)/(1 + r) + (+20+280)/(1 + r)2=0 <=> - 100 - 140/(1 + r) + 300/(1 + r)2=0 |
| Gooner7 | is there a way to do time-weighted calculation on TI BA II+ ? |
| DonAnd | There is a similar example for calculating Money-Weighted(Dollar-Weghted)rate of return on p.246 in the text. |
| LONG | For dollar-weighted rate of return I can TI BAII as following and get the same result 16.8154%: CFo=-100 C01=-140 C02=300 IRR=16.8154 and same as: CFo=0 C01=-100 C02=-140 C03=300 IRR = 16.8154 |
| poomie83 | Long, could you explain why 140 is negative? Also why is the cash flow at end of year 2 $300 when that is the value at end of year 1? And don't we account for the dividends? |
| TiredHand | $140 is negative because the dude paid $150 for a second IBM share (unwise) which is -$150, but he received a $10 dividend. $-150 + $10 = $-140. Not that I could do that question in an exam. |
| niyongana | in which situation liquidity and maturity cannot be investment constraint illustration by using numerical example |
| ran123 | Can someone please show how the dollar weighted return example was calculated manually(step by step)? Thanks |
| jonan203 | can you rephrase your question? |
| tshepi | van you share how to do it on the HP12c |
| Callie2 | HP12C: 100[CHS][g][CF1] (price of 1st share) 140[CHS][g][CF1] (price of 2nd share - $10 div) 300[g][CF1] (proceeds plus two $10 div) [f][IRR] =16.8154 |
| bschmitt | For BAII Plus, what is F01 and F02 in the calculation please? |
| schweitzdm | F01 and F02 refer to the frequency of cash flows. If it only happens once, leave it at 1. |
| Inspector | HPR = (Ending price - beginning price + dividends) / beginning price so why do the notes say HPR = (Ending price + dividends)/ beginning price... wtf HPR = ((MV1 - MV0 + D1 - CF1)/MV0) Where: MV0 = beginning market value, MV1 = ending market value, D1 = dividend/interest inflows, CF1 = cash flow received at period end (deposits subtracted, withdrawals added back) |
| littlecow | @Inspector: you missed the -1 part. The notes says HPR = (Dividends + Ending Price)/Beginning Price - 1, this is exactly the same as what you have: HPR = (Ending price - beginning price + dividends) / beginning price |
| ajshittu | HP 12c Platinum Financial Calculator - IRR Calculation 100(CHS)(g)(CF0) 140(CHS)(g)(CFj) 300(g)(CFj) 2(RCL)(n) (f)(IRR) |
| kaichan91 | Can someone elaborate on the part that talks about inflation/depression of the dollar-weighted rate of return? I'm a little confused about the mathematical relationship of the two. |
| Rudger | I dont understand how the square root of 1.06 is 1.26. I get 1.29. ANy help anyone? |
| khalifa92 | in long time horizons situations? |
| gjohnub | Here's how I do it. 1.He buys $100 of share on Dec 31, 2000 : so beginning price = $100 2.He buys $150 of share on Dec 31, 2001: so ending value = $150 3. So HPR = (ending- beginning + dividend)/ beginning = (150 - 100 + 10) / 100 = 0.6 4. Then, he sold shares for $140 on Dec 31, 2002. so ending value = $140 and beginning value = $150 from previous year. 5. So HPR = (ending - beginning + dividend) / beginning = (140 - 150 + 10) /150 = 0 6. TWRR = [(1+0.6)(1+0)]^1/2 - 1 ( 1/2 because 2 years ) = 0.26 |
| 931129 | Go over the calculations here. |
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