Reading 6: Discounted Cash Flow Applications - LOS c, (Par following, respect, period, return, style

mayanfang1

Q1. Which of the following is most accurate with respect to the relationship of the money-weighted return to the time-weighted return? If funds are contributed to a portfolio just prior to a period of favorable performance, the:

A)   time-weighted rate of return will tend to be elevated.

B)   money-weighted rate of return will tend to be depressed.

C)   money-weighted rate of return will tend to be elevated.

Q2. The money-weighted return also is known as the:

A)   return on invested capital.

B)   measure of the compound rate of growth of $1 over a stated measurement period.

C)   internal rate of return (IRR) of a portfolio.

Q3. Which of the following statements regarding the money-weighted and time-weighted rates of return is least accurate?

A)     The time-weighted rate of return reflects the compound rate of growth of one unit of currency over a stated measurement period.

B)     The money-weighted rate of return removes the effects of the timing of additions and withdrawals to a portfolio.

C)     The time-weighted rate of return is the standard in the investment management industry.

mayanfang1

答案和详解如下：

Q1. Which of the following is most accurate with respect to the relationship of the money-weighted return to the time-weighted return? If funds are contributed to a portfolio just prior to a period of favorable performance, the:

A)   time-weighted rate of return will tend to be elevated.

B)   money-weighted rate of return will tend to be depressed.

C)   money-weighted rate of return will tend to be elevated.

Correct answer is C)

The time-weighted returns are what they are and will not be affected by cash inflows or outflows. The money-weighted return is susceptible to distortions resulting from cash inflows and outflows. The money-weighted return will be biased upward if the funds are invested just prior to a period of favorable performance and will be biased downward if funds are invested just prior to a period of relatively unfavorable performance. The opposite will be true for cash outflows.

Q2. The money-weighted return also is known as the:

A)   return on invested capital.

B)   measure of the compound rate of growth of $1 over a stated measurement period.

C)   internal rate of return (IRR) of a portfolio.

Correct answer is C)

It is the IRR of a portfolio, taking into account all of the cash inflows and outflows.

Q3. Which of the following statements regarding the money-weighted and time-weighted rates of return is least accurate?

A)     The time-weighted rate of return reflects the compound rate of growth of one unit of currency over a stated measurement period.

B)     The money-weighted rate of return removes the effects of the timing of additions and withdrawals to a portfolio.

C)     The time-weighted rate of return is the standard in the investment management industry.

Correct answer is B)

The money-weighted return is actually highly sensitive to the timing and amount of withdrawals and additions to a portfolio. The time-weighted return removes the effects of timing and amount of withdrawals to a portfolio and reflects the compound rate of growth of $1 over a stated measurement period. Because the time-weighted rate of return removes the effects of timing, it is the standard in the investment management industry.

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