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Time-Weighted vs Money-Weighted Return

Compare TWR and MWR with formulas, examples, and CFA Level I interpretation rules.

TL;DR

Time-weighted return removes the effect of external cash flows and is best for evaluating manager skill. Money-weighted return is an IRR and reflects both investment performance and timing of investor cash flows.

Formula Reference

Time-weighted return

TWR = [(1 + r_1)(1 + r_2)...(1 + r_n)] - 1

Link subperiod returns around cash flow dates.

Money-weighted return

0 = PV(outflows) - PV(inflows) using IRR

Solve as the internal rate of return on investor cash flows.

BA II Plus Keystrokes

  1. For TWR, compute each holding-period return separately.
  2. Add 1 to each subperiod return, multiply them, then subtract 1.
  3. For MWR, use CF worksheet and solve IRR.

Worked Example

  • A portfolio gains 10 percent before a contribution and loses 5 percent after.
  • TWR = (1.10 x 0.95) - 1 = 4.5 percent.
  • MWR depends on the size and timing of the contribution.

Common Mistakes

  • Calling TWR the investor's actual earned return when large external flows occurred.
  • Using arithmetic average subperiod returns instead of geometric linking.
  • Ignoring cash flow timing in MWR.

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