In a practice question for money weighted calculation, stock paid 2 dollars end of year 1 and year 2.
we have the cash flows as -50, 65 - div , 140 + divs,
where you do Cf0 = -50 , Cf1 = -63 , Cf2 = 144 CPT IRR 18.02
but when doing time money weight we do 65 + div / 50 , 140 + divs / 130 .
Then we multiply both rates and ^5.
a) I don’t understand why we go from subtracting the div in money weighted and adding the div in time weighed.
b) where is 130 coming from?
- in time weighted why do you do to the ^5? Is it always ^5?
For a time-weighted calculation, you treat each period as a separate investment.
Here:
- Your first investment was one share of stock: you bought it at 50, and at the end of the holding period you sold it and had 67 (= 65 + 2).
- Your second investment was two shares of stock: you bought them at 130 (= 65 × 2), and at the end of the holding period you sold them and had 144 (140 + (2 × 2)).
You’re raising the compound return to the ½ power because the compound return occurred over 2 periods and you want to know the one-period compound return. If you had had returns over three periods you would raise the compound return to the ⅓ power to get the single-period return. And so on.
Thank you.
Is there any better way to calculate this, maybe with financial calc? or even remember this?
I think the signs are mixing me up, money weight in different years we have them as negative because they are outflows i guess, but in time weighted these arent outflows?