Time Weighted Rate of Return
This video discusses the concept of “Time
Weighted Rate of Return”. Please refer to “Money Weighted Rate of Return”
for comparison. The following is a part of the transcript.
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Money-weighted rate of return and
time-weighted rate of return are two important concepts you must understand for
the CFA exam. For time-weighted rate of return, it calculates the effective
compound growth of every $1 invested. When a portfolio manager has no complete
control of the cash flow, time-weighted rate of return should be used because
this indicates the real investment ability of the manager.
The following are the procedures:
1)
List
all the asset at the beginning and ending of each periods
2)
For
each period, find the growth rate of the asset by considering the beginning and
ending balance
3)
Find
the effective growth rate by using the geometric mean of the growth rate in
each period
Please see
the video for an example.
I am a little confused, I thought rate of return was calculated as follows:
((Return – Capital) / Capital) × 100% = Rate of Return
So in the case above we would have (61-50)/ 50 which = .22 and (130-120)/120 which = .0833 Geometric mean then equals the square root of (.22 * .0833) which is .1354 ( 13.54%) and not 15%.
Please advise.