Attribution

Lancaster case In Assessment:

Q -Carol Lancaster of Trident Funds is discussing portfolio performance evaluation with a new employee, Mary Clark. Clark asks Lancaster why there is a preference for using a time-weighted rate of return (TWR) instead of a money-weighted rate of return (MWR). Lancaster informs Clark that MWR always has an upward bias relative TWR whenever the fund receives large contributions during a particular period. Consequently, TWR is the preferred metric.

A-25. Lancaster’s statement about the money-weighted rate of return (MWR) is most likely: A. correct. B. incorrect, because the MWR is always equivalent to the time-weighted rate of return (TWR). C. incorrect, because the MWR can have downward and upward bias relative to the time-weighted rate of return (TWR).

C

Why not A?

The statement says “always” has an upward bias “whenever”…

That is incorrect as it is not always and whenever as it depends when, early or late part if investment period the fund receives the inflow.

Thanks perdition for making that clear.

You can have a cash withdrawal that could bias the MWR down.

+/- cashflow

Q says “receives large contribution”. It will increase MWR ?!!!

Wouldnt it have a downward bias if after the contribution the asset decreases in value, thus exacerbating the decline?

If you have a large contribution before returns increase, the MWR is biased upward.

If you have a large contribution before returns decrease, the MWR is biased downward.

what he said ^

Yap. Thanks.