# money and time weighted return...........

please explain them logically…or thru a example

If funds are deposited into the investment portfolio prior to a period of superior performance ,money weighted return will be higher than time weighted return

If funds are deposited into the investment portfolio just before a period of relatively poor perfoermance ,money weighted return will be lower than time weighted…

Scenario 1:

You deposit \$1,000 in an account; it earns 10% that year, so you have \$1,000 × 1.1 = \$1,100

You deposit another \$1,000; it earns 20% that year, so you have (\$1,100 + \$1,000) × 1.2 = \$2,520.

Scenario 2:

You deposit \$1,000 in an account; it earns 20% that year, so you have \$1,000 × 1.2 = \$1,200

You deposit another \$1,000; it earns 10% that year, so you have (\$1,200 + \$1,000) × 1.1 = \$2,420.

In both scenarios, the time-weighted average return is (1.1 × 1.2)^0.5 – 1 = 14.89%.

The IRR in scenario 1 is 16.43%.

The IRR in scenario 2 is 13.40%.

thank u sir…

U really help simplify the complicated side so easily…

My pleasure.

If I deposit another 1000, and that 1000 earns me 20%, I should have 1100+1200. Why is 1100 multiplied by 1.2? Sorry, if this is a very silly question to ask.

When I wrote “it earns 20%”, the “it” was the entire account, not just the new deposit. All the money’s in the same account, so it’s all earning the same return.

cool

please how did you calculate the IRR’s.what cash flows did you use.thus CF0,CF1…am not getting the answer.

You have to use all of the cash flows.

Also, the final balance is a cash flow. Treat it as if the account were closed and the balance returned to the investor.

Make sure you have the correct sign on each cash flow.

in both cases: CF0 = -1000, (deposit hence minus sign) C01 = -1000, (deposit hence minus sign) F01 = 1 Scenario 1: C02 = +2520 (withdrawal hence plus sign) F02 = 1 Scenario 2 C02 = +2420 (withdrawal hence plus sign) F02 = 1