Page 91 - CFA - Day 1 & 2 Course Notes
P. 91
LOS 7.d: Calculate and compare the
money-weighted and time-weighted rates Session Unit 2: Discounted Cash Flow Applications
of return of a portfolio and evaluate the
performance of portfolios based on these
measures.
Step 2: Net the cash flows for each time period and set
the PV of cash inflows equal to the PV of cash outflows.
Step 3: Solve for r to find the money-weighted rate of return.
The intuition here is that we deposited $100 into the account at t = 0, then added $118 to the account
at t = 1 (which, with the $2 dividend, funded the purchase of one more share at $120), and ended with
a total value of $264.
Financial calculator (IRR) CF0 = +100; CF1 = +120 – 2 = +118; CF2 = –260 + –4 = –264
