Time Weight Problem because, problems, additional, holding, helping

Nishant1

I'm having a little problem understanding one of the problems int he CFAI text if someone dont mind helping me, P 250, Example 5.

On Jan 1 03, W fund had market value of $100k
Jan 1 to April 30, $10k in cap gain
May 1, $2k dividend paid, all were reinvested
May 1, additional $20k reinvested. Total value $132 (100+10+2+20)

Shouldn't the first holding period be from Jan 1 to April 30 because:
1. Thats the first 3 months, quarterly
2. Ending value given at April 30, $10k in cap gain

So HP1 = 10/100 = 10%

But the example has it as 12/100 = 12%?????

dotamasta

Holding Period is from Jan1 to April 30 (Close of Business) , but the $2 million dividends paid are for the securities held for that specific 4 month period (thats why it says paid on May 1st), so it is counted in the formula
(P1-P0 +D1)/P0 (Note that the $20MM inflow is NOT counted here since its not part of the returns)

Similarly for money weighted returns, the end of Jan-April period is where the first discounting starts. So all cash inflows/outflows happening at the end of that period counts. While discounting to calculate IRR as MW returns, the $2MM dividend and the $20MM additional cash is discounted by 1 period. (not 2 periods)

Ionutzakis

Remember returns = capital gains + income earned, threfore the price appreciation is the cap gains and the dividend is the income earned.

Jolyn

Thanks you everyone.

I guess it makes sense. So they could have said that the $2 Million dollar dividend for Jan 1 to April 30, was paid Dec 31, and that $2 Million would still have to be counted in HP1?? (Yea a little weird but just want to grasp the timing idea of earned and received)

JoeyDVivre

L1toL3EZ Wrote:
-------------------------------------------------------
> Thanks you everyone.
>
> I guess it makes sense. So they could have said
> that the $2 Million dollar dividend for Jan 1 to
> April 30, was paid Dec 31, and that $2 Million
> would still have to be counted in HP1?? (Yea a
> little weird but just want to grasp the timing
> idea of earned and received)

If the dividend wasnt received during the holding period you would not count the cash flow. If instead the dividend payment occurred at Dec 31 of that same year (after April 30), you would not record the dividend in the Jan - May returns, there was no cash flow. it would be included in the Jan - December returns. The income earned is specific to the time period and cash flow dependent.