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Time Weighted return and dividend reinvestment

Hi everyone,

When using the time weighted return method, would a dividend reinvestment affect the second year period beginning balance? For example, if a t=0 I purchase a stock at $100, at the end of the year I get a $2 dividend and purchase another stock for $105. At the end of year 2, I sell both stock for $110 and get $2 per stock.

Time weighted return without reinvestment = 6.83%

105 + 2 -100/100 = 7%

220 + 4 - 210/ 210 = 6.67%

(1.07 * 1.0667)^0.5 = 6.83%

Time weighted return with reinvestment: 6.33%

105 + 2 -100/100 = 7%

220 + 4 -212/212 = 5.66%

(1.07 * 1.0566)^0.5 = 6.33%

Would a dividend reinvestment increase the period beginning balance in period as in scenario 2?

Thank you for your time!

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Your first method would be correct. Dividend reinvestment would not increase the beginning period balance. 

Thanks, this is what I thought. I guess the dividend is used as part of the purchase price of the second stock so there is no difference.

cfageist, you violate CFA ethics by using your nick ))

lol I do not think I do, if it was ”CFA” then I would. But I am using cfa.