Reading 43: Evaluating Portfol....rmance－LOS c,(Part 2) return

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 43: Evaluating Portfolio Performance
LOS c, (Part 2): Discuss how time-weighted and money-weighted rates of return are affected by cash contributions and withdrawals.

[此贴子已经被作者于2008-9-17 16:53:23编辑过]

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Tom Stovall is a portfolio manager who tracks the Wilshire 5000 Index. He received a large cash inflow from a client prior to a bull market. Which of the following most accurately characterizes the relationship for the time-weighted return and the money-weighted return for Tom? The time-weighted return will be:

A) inflated by the timing of the cash inflow and the time-weighted return will be larger than the money-weighted return.

B) unaffected by the timing of the cash inflow and the time-weighted return will be larger than the money-weighted return.

C) unaffected by the timing of the cash inflow and the time-weighted return will be smaller than the money-weighted return.

D) inflated by the timing of the cash inflow and the time-weighted return will be smaller than the money-weighted return.

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Answer and Explanation

If a manager receives a large cash inflow from a client prior to a bull market, the money-weighted return will be higher than the time-weighted return. The time-weighted return will be unaffected by the timing of the cash inflow.

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One limitation of the money-weighted return is the fact that it:

A) requires computations every time a cash flow occurs.

B) does not capture the differences in currency values.

C) penalizes managers for cash flows that occur outside of their control.

D) computes the return independent of the cash flows.

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Answer and Explanation

The money-weighted return computation penalizes managers for cash flows that occur outside of their control.

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One limitation of the time-weighted return is the fact that it:

A) requires computations every time a cash flow occurs.

B) requires the computation of the internal rate of return every time a cash flow occurs.

C) penalizes managers for cash flows that occur outside of their control.

D) is difficult to compare with standard industry benchmarks.

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Answer and Explanation

The time-weighted return computation requires computation of return every time a cash flow occurs. One of the advantages of the time-weighted return is that passive benchmarks use the same calculation methodology which makes it comparable to passive benchmarks and other portfolio managers.