Money Weighted-Return additional, investment, stocks, capital, Because

wonderfuldream

Task is to compute the investment performance and to find the money-weighted rate of return: NOTE THAT THIS INFORMATION IS TAKEN DIRECTLY FROM CFAI:

- On 1 Jan 2004, the Walbright Fund had a market value of $100M
- During the period 1 Jan 2003 to 30 April 2003, the stocks in the fund showed a capital gain of $10M
- On 1 May 2003, the stocks in the fund paid a total dividend of $2M. ALl dividends were reinvested in additional shares
- Because the fund's performance had been exceptional, institutions invested an additional $20M in Walbrihgt on 1 May 2003, raising assets under management to $132M ($100 + $10 + $2 + $20).
- On 31 Dec 2003, Walbright received total dividends of $2.64M. The fund's market value of 31 Dec 2003, not including the $2.64 M in dividends, was $140M.
- THe fund made no other interim cash payments during 2003.

The solution clearly states that the periods are split in four-month intervals. HOWEVER, the solution stated that the $2M dividend in May fell in the first four-month interval. I say this is incorrect because May clearly falls under the second four-month interval (Jan-Apr, May-Aug, Sept-Dec).

I've read and re-read and I cannot get this through my head. Please, can someone clarify.

nitoha

Strictly speaking, you are correct. 1st May should be counted in the 2nd qtr.

But practically, the difference is only 1 day. You could take it as end of the day on 30th Apr. Looking at it other ways, most banks usually ignore 1st day in calculation of interest figure anyways.

1) If you take it as at the end of 1st qtr, you could calculate IRR easily by taking no of periods as 3.

2) If not, then either you will need to discount 2M amount by 1 day to place it on 30 Apr, or use 365 as number of periods in your IRR calculation. Either ways, your IRR would be very very close to the one calculated in 1).

Hope this helps.

ajpheif16

Also note that in CFA Exam, you will get only 1.5 minutes to solve each question and it will not matter at all if your calculation is accurate upto 4 decimal places.

hariRaj

Am I not wrong to say that we can view money weighted question from a fund's perspective instead of the usual investor's perspective with regards to the inflow and outflow of money?

Anyway, with regards to this question, how come there was a $2m inflow and $2m outflow? I thought the $2m was reinvested into the fund, which mean an inflow only?

soddy1979

revenant Wrote:
-------------------------------------------------------
> Am I not wrong to say that we can view money
> weighted question from a fund's perspective
> instead of the usual investor's perspective with
> regards to the inflow and outflow of money?
>
> Anyway, with regards to this question, how come
> there was a $2m inflow and $2m outflow? I thought
> the $2m was reinvested into the fund, which mean
> an inflow only?

Any input?

Thanks.

cyber21

The question doesn't indicate that the $2M was an outflow, only that it was reinvested into the fund. I don't see where you are confused.

Nevertheless, my question was regarding the time intervals, not inflows and outflows.