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The time weighted rate of returnPowerPoint Presentation

The time weighted rate of return

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The time weighted rate of return

The portfolio received two cash flows during month t:

a contribution of EUR 30.000 on day 5

a contribution of 20.000 on day 16.

We have a daily pricing system that provides us with values of the account of 1.045.000 and 1.060.000 on days 5 and 16 of the month, respectively. Final value is 1.080.000.

We can calculate 3 separate subperiod returns using the rate of return computation:

The time weighted rate of return

The TWR derives its name from the fact that each subperiod return within the full evaluation period receives a weight proportional to the length of the subperiod relative to the length of the full evaluation period.

The money weighted rate of return

The MWR of the preceding example is found solving the following equation:

There exists no closed-form solution for R. R must be solved iteratively. In this case r = 0.0009536. this is the portfolio’s daily rate of return during the month. In a monthly basis MWR is

Sector weighting-Stock selection.

The health care industry sector represents 10% of a given benchmark (wb1 = 10%). The manager has decided to allocate 12% of its portfolio to this sector (wp1 = 12%). The return of the health care industry sector as weighted in the benchmark is rbj = 5%, it is rpj = 7% in the manager portfolio. The overall benchmark has a performance of rb = 3%.

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