For time weighted rate of return calculations, is it necessary that the time period between inflow and outflow be the same? In my opinion, it is not necessary that they be same, because ultimately we are applying the concept of geometric mean, which doesn’t ask for equal time intervals.
Also, whenever there is an inflow/outflow of cash, is it necessary to form subperiods based on these inflows and outflows and then calculate HPY and take their geometric mean? What will be the difference, say, in the following situation:
A buys a stock at 50 at t=0. Three months later, A buys a share of this stock (In Schweser’s Notes, “This” is not mentioned. They have assumed the same stock is being talked about. Should we expect the same pattern on the exam?) at 55. At end of year 1, A buys another stock at 60. At the end of yr 2, A sells all three at 70. Doubt: If I calc HPY for yr 1 and yr 2 and then take their geometric mean, instead of calc it for all three subperiods, what diffr will it potentially make? Why is this diffr occuring?
If the time periods are unequal, it’s difficult to interpret the geometric mean. Suppose that you have a 50% increase over 3 months, then a 20% decrease over one month. The geometric mean return is 9.54% (as we saw in another thread). That’s a 9.54% return over what period? One month? Three months? Two months (the arithmetic mean of one month and three months)? 1.732 months (the geometric mean of one month and three months)? Something else?
Absolutely. So, they have to be based on equal intervals of time. What do we do if in exam they test us on unequal intervals of time? Is there any example problem on treatment of unequal periods of time?