Lesson 7 of 10 · All lessons in this module
- What an interest rate is made of
- Holding period return
- Arithmetic and geometric mean returns
- Harmonic, trimmed and winsorized means
- Money-weighted return
- Time-weighted vs money-weighted returnVideo lesson
- Integrated cases: balance tables, money-weighted and time-weighted returns
- Annualised and continuously compounded returnsVideo lesson
- Gross, net, after-tax, real and leveraged returnsVideo lesson
- Integrated cases: from total return to what the investor keeps
Lesson 7 of 10 · 16 min
Integrated cases: balance tables, money-weighted and time-weighted returns
When a case gives you only start-of-year balances and yearly returns, roll the balance forward to find the new money each year, then use those flows for the money-weighted return and the yearly returns for the time-weighted return.
In short
- The new money at the start of a year = the net balance at the start of that year − the previous year's ending balance. A negative result is a withdrawal.
- The investor's final cash flow is the last ending balance: last balance × (1 + last return).
- The TWR uses only the yearly returns (geometric mean); the MWR is the IRR of the new-money flows and the ending value.
- A fund can have a positive TWR and a negative MWR when most of the money arrives before a weak year.
- In a quarterly table where cash arrives at the start of each quarter, the quarter's return is the ending value ÷ (previous ending value + that quarter's cash flow) − 1.
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