Compare dollar-weighted and time-weighted calculations of returns|Quick homework help

Posted: January 28th, 2023

Compare dollar-weighted and time-weighted calculations of returns. Under what circumstances would one be more suitable?

SOLUTION

methods for determining the performance of an investment portfolio.

Dollar-weighted returns, also known as internal rate of return (IRR), take into account the timing and size of cash flows into and out of the portfolio. This method is more suitable for evaluating an individual investor’s performance, as it accounts for the effect of their investment decisions on the overall return.

Time-weighted returns, on the other hand, do not take into account the timing and size of cash flows. Instead, they focus on the portfolio’s performance over a specific period of time, regardless of any cash flows. This method is more appropriate for evaluating the performance of a portfolio manager, as it isolates the manager’s investment decisions from the effects of external factors such as cash inflows and outflows.