MWRR(IRR) Calculation doubt

Found this one a bit tricky from the Portfolio Management section of a mock exam.Does anyone have any inputs on getting around to the answer.

An investor’s transactions in mutual funds and the fund’s returns over a 4 year period are

Year 1

Year 2

Year 3

Year 4

New Investment at the beginning of the year (US$)

2,500

1,500

1,000

0

Investment return for the year

-20%

65%

-25%

10%

Withdrawal by the investor at the end of the year

0

-500

-500

0

Based on this data, the money-weighted return (or internal rate of return) for the investor is closest to

A: 7.50%

B: 2.15%

C: 3.96%

ANSWER:- 3.96%

I dont know if you have ever worked with a portfolio management/performance softwre but when you run intervals on a portfolio it will show you bgn balance, dividends, interest, capital appreciation, deposits/withdrawals, and ending balance and then gives you a periodic return that can be linked to find the TWR.

Long story short this is how I got the correct answer for this question. In my opinion the best way to set up these problems is to set up intervals like these so you can see the actual net inflows and outflows on a year by year basis and then enter them into your calculator. Its tricky but mapping it out year by year is the best way to go.

This is how you calculate TWRR:

Start by calculating your cash flows (substract inflows and add withdrawals) :

Year 1: -2500 at the beginning and 0 at the end ----- CF0=-2500

Year 2: -1500 at the beginning ---- C01=-1500

Year 3: 500 withdrawal (at the end of year 2) - 1000 deposit at the beginning ----- C02= -500

Year 4: 500 withdrawal (at the end of year 3) ----- C03=500

Then you calculate your C04, which the end of year 4:

Year 1: 2500 x (1-0.20) = 2000

Year 2: (2000 + 1500) x 1.65 = 5775

Year 3: (5775-500+1000) x (1-0.25) = 4706.25

Year 4: (4706.25-500) x 1.10 = 4,626.75 ------ this is your C04 (how much you get back at the end of your total investments)

Once you have enterred all the values in the CF function, click on CPT then IRR and you will find 3.96%

1 Like

Awesome - Many thanks indeed

this explanation is amazing. thank you

Here is video I found that is almost the same question…good explanation too…