Can you please help me with this problem?
Fund A and Fund B both have assets of 100 at the beginning of a year. Each fund shows a return of 2% in the first half of the year and a return of 20% in the second half. There is a positive cash flow for Fund A and Fund B of 50 and 10 respectively, occurring exactly half-way through the year in each case. Find money weighted return.
My answer was 12.349% But, official answer is 26.2%.
My CF0 = 100; CF1 = 50; CF2 =(-182.4)
Any help will be greatly appreciated.
Thanks
Watchtower
Source: Page 287 of this book http://books.google.com/books?id=pERslQ_qLEEC&pg=PA287&lpg=PA287&dq=money+weighted+return+mathematics&source=bl&ots=QN5DlKW8gy&sig=FgVZRMH4biJZHTYF726ilhbLwog&hl=en&sa=X&ei=vvuSUunPNYfSkQe92YGoBg&ved=0CDgQ6AEwAjgK#v=onepage&q=money%20weighted%20return%20mathematics&f=false
Your IRR is a semiannual rate; theirs is annual.
Be careful.
Could you please elaborate? I didn’t quite get it. I am new to Finance, and just started studying this thing. Please help. {I did find Effective Annual return using EAR = ((1-r)^2 ) - 1} But how did you guess that my IRR is semi-annual? I am a bit lost. Is it that because my “interval/period” is semi-annual?
Yes, I knew it because your interval/period was semiannual. When you calculate an IRR, you get an interest rate for one period (and the IRR calculation doesn’t know – nor does it care – how long one period is). It’s up to you to convert that to an annual rate, if your period is not one year.
So . . . be careful.
(By the way, I hope that you meant EAR = ((1 _ + _ r)²) – 1.)