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.
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 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 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
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%.