optiix

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

A) computes the return independent of the cash flows.

B) requires computations every time a cash flow occurs.

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

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

optiix

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

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

B) requires computations every time a cash flow occurs.

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

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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.

optiix

Which of the following least accurately characterizes the time-weighted return? The time-weighted return:

A) can be expensive and error prone.

B) is most appropriate for a manager who cannot control the timing of the cash flows in and out of the fund.

C) is similar to the internal rate of return.

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The time-weighted return is not similar to the internal rate of return. The money-weighted return is similar to the internal rate of return and is also known as the linked internal rate of return. The other responses accurately characterize the time-weighted return.

optiix

For a global portfolio, the money-weighted returns for the four quarters of last year are: 3%, -2%, 5%, and 2.5%. The corresponding time-weighted returns are: 2.5%, -1%, 4%, and 3.5%. What would an investor report as the annual rate of return on the portfolio?

A) 9.0%.

B) 8.64%.

C) 9.23%.

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For reporting purposes, time weighted return is reported. Annual return = 1.025 × 0.99 × 1.04 × 1.035 − 1 = 0.0923 or 9.23%.

optiix

What is the major difference between the money-weighted and time-weighted rate of return? The money-weighted return:

A) computes the return more precisely using the internal rate of return computation while time-weighted return computation is an approximation.

B) penalizes managers for cash flows that occur outside of their control while the time-weighted return does not.

C) is averaged across periods to arrive at an annual rate of return while the time-weighted return is compounded across periods to arrive at an annual rate of return.

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The time-weighted return is computed every time a cash flow occurs, so it does not penalize managers for cash flows that occur outside of their control. The money-weighted return, on the other hand, is impacted by cash flows. Note that an approximation for different time periods can be made when using the time-weighted return, however, using an approximation would be at the discretion of the person calculating the return and is not part of the methodology behind the time-weighted return calculation.

optiix

The time-weighted return measures the:

A) return on the average investment during the period.

B) return per unit of domestic currency.

C) total return during the period.

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The time-weighted return measures the return per unit of domestic currency. The calculation involves taking a geometric average of the returns of the various sub-periods.

optiix

The money-weighted return measures the:

A) return on the average investment during the period.

B) total return during the period.

C) return per unit of domestic currency.

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The money-weighted return measures the return on the average investment during a specific time period. The money-weighted return computation uses the concept of an internal rate of return.

optiix

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.

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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.

optiix

Which of the following formulas would represent an appropriate calculation of the rate of return earned by a fund when the fund receives an external cash flow at the beginning of a period?

A)

B)

C)

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If an external cash flow is received at the beginning of a period then the market value at this point is adjusted to include that cash flow, it is added to the opening market value of the fund and it is added to the denominator. In this way, the return measure reflects the return on the funds under management during the measurement period.

optiix

The Campbell account is $5,000,000 at the beginning of January and $5,200,000 at the end of the month. During the month a contribution of $60,000 was received. What would be the rate of return on the account if the contribution was received on January 1, what would it be if the contribution was received on January 31?

January 1

January 31

A) 2.77% 2.80%

B) 2.77% 4.00%

C) 4.00% 2.80%

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If the receipt was at the beginning of the period then:


If the receipt was at the end of the period then: