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

CFA Level I
#1

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…

#2

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%.

#3

thank u sir…

U really help simplify the complicated side so easily…

#4

My pleasure.

I’m glad you think so.

#5

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.

#6

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.

#7

cool

#8

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

#9

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.

#10

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