Time-Weighted Rate of Return
The Time Weighted Rate of Return (TWR) is similar to the Money-Weighted Rate of Return however it attempts to eliminate any distortions caused by the timing of new money.
V2 = value of the portfolio at the end of the second period
Example:
A client invests £40,000 at the start of the year, after 6 months the portfolio is valued at £45,000 and a further £15,000 is invested. At the end of the year the portfolio is worth £68,000. Calculate the TWR.
-First we need the value of the portfolio at the start and end of each period:
-Now we need the value of any cash flows:
-We then place these figures into the formula:
-The TWR is 27.5%. This is the overall return achieved on the portfolio at the end of the year, eliminating any distortions caused by timing of new money.
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
The majority of questions in the exam will look at the characteristics of TWR and the comparison
between TWR and MWR. However, it is important to fully understand the formula. The kind of
questions asked are as follows.
1. In respect of the money-weighted rate of return (MWR) and the time-weighted rate of return (TWR)
it is TRUE to say that:
You must select ALL the correct options to gain the mark:
a) the MWR is appropriate for evaluating and comparing different portfolios.
b) the MWR is not influenced by the timing of cash flows.
c) TWRs are universally used for comparative purposes.
d) TWRs attempt to eliminate the distortions caused by the timing of new money.
e) the MWR measures the overall return on capital invested over a specific period.
C, D & E)
- Further Study Text: Pages 399 - 401