Time weighted and money weighted return

CFA Level I Portfolio Management
#1

Dear guys,

I have a question related to these methods.

i have a stock, Po=100, invest in 2 years, DIV at the end of each year:$2, P1&P2 are 120 and 130

  1. If i calculate return based on time weighted:
    R=15.84%
  2. If return based on money weighted: return= IRR=15.896%

Could you please help me distinguish these methods. Many thanks

#2

Hi, the difference is because when you are doing TWRR calculation you are removing cash flow impact. With MWRR there is weightage on cashflows. This causes the returns to vary. Portfolio managers do no control cash flows so they use TWRR and investors (individuals) control cash flows so MWRR is better measure.

#3

This is usually true, but not always.

When they do control the cash flows into and out of the portfolio, then the MWRR is the proper measure of their performance.

#4

Yes, i know the purpose for those ways but i suppose that both should have same result :grinning: