clearlycanadian

On January 1, Jonathan Wood invests $50,000. At the end of March, his investment is worth $51,000. On April 1, Wood deposits $10,000 into his account, and by the end of June, his account is worth $60,000. Wood withdraws $30,000 on July 1 and makes no additional deposits or withdrawals the rest of the year. By the end of the year, his account is worth $33,000. The time-weighted return for the year is closest to:

A) 7.0%.

B) 10.4%.

C) 5.5%.

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January – March return = 51,000 / 50,000 − 1 = 2.00%
April – June return = 60,000 / (51,000 + 10,000) − 1 = –1.64%
July – December return = 33,000 / (60,000 − 30,000) − 1 = 10.00%
Time-weighted return = [(1 + 0.02)(1 − 0.0164)(1 + 0.10)] − 1 = 0.1036 or 10.36%

clearlycanadian

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 elevated.

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

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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.

clearlycanadian

The money-weighted return also is known as the:

A) return on invested capital.

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

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

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

clearlycanadian

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

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

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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.

clearlycanadian

An analyst managed a portfolio for many years and then liquidated it. Computing the internal rate of return of the inflows and outflows of a portfolio would give the:

A) money-weighted return.

B) time-weighted return.

C) net present value.

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The money-weighted return is the internal rate of return on a portfolio that equates the present value of inflows and outflows over a period of time.

clearlycanadian

Time-weighted returns are used by the investment management industry because they:

A) result in higher returns versus the money-weighted return calculation.

B) take all cash inflows and outflows into account using the internal rate of return.

C) are not affected by the timing of cash flows.

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Time-weighted returns are not affected by the timing of cash flows. Money-weighted returns, by contrast, will be higher when funds are added at a favorable investment period or will be lower when funds are added during an unfavorable period. Thus, time-weighted returns offer a better performance measure because they are not affected by the timing of flows into and out of the account.

clearlycanadian

Why is the time-weighted rate of return the preferred method of performance measurement?

A) Time weighted allows for inter-period measurement and therefore is more flexible in determining exactly how a portfolio performed during a specific interval of time.

B) Time-weighted returns are not influenced by the timing of cash flows.

C) There is no preference for time-weighted versus money-weighted.

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Money-weighted returns are sensitive to the timing or recognition of cash flows while time-weighted rates of return are not.

clearlycanadian

A 10% coupon bond was purchased for $1,000. One year later the bond was sold for $915 to yield 11%. The investor's holding period yield on this bond is closest to:

A) 9.0%.

B) 18.5%.

C) 1.5%.

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HPY = [(interest + ending value) / beginning value] − 1
= [(100 + 915) / 1,000] − 1
= 1.015 − 1 = 1.5%