Time-weighted return

The compound growth of one unit over the period, linking returns between external cash flows so their timing and size have no effect. The standard measure for a manager who does not control the flows.

Where you will meet it

Time-weighted return appears in 6 learning outcomes on the CFA syllabus. A few of them:

• Contrast money-weighted with time-weighted rates of return
  CFA Level I · Quantitative Methods

  “A time-weighted return chains the returns of each sub-period and is unaffected by those flows.”

• Differentiate the internal rate of return and time-weighted return when applied to alternatives
  CFA Level I · Alternative Investments

  “Time-weighted return measures the performance of a strategy independently of when money entered or left, which is why it is the standard for evaluating a manager of a fund the investor can enter and exit freely.”

• Explain why private-market results cannot be read like listed-market returns, and compute and interpret the paid-in multiples DPI, RVPI and TVPI and when each is useful
  CFA Level III · Private Markets Pathway

  “The GP controls when capital is called and returned, so private funds report money-weighted IRRs and multiples, not time-weighted returns, and comparing them with an index needs a public market equivalent (PME).”

• Judge whether a private client's investment programme is working, using performance reports and periodic reviews
  CFA Level III · Private Wealth Pathway

  “Time-weighted return is the right tool for judging the manager, while money-weighted return reflects the client's own experience including the timing of contributions and withdrawals.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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