Page 93 - CFA - Day 1 & 2 Course Notes

LOS 7.d: Calculate and compare the money-
weighted and time-weighted rates of return of Session Unit 2: Discounted Cash Flow Applications
a portfolio and evaluate the performance of
portfolios based on these measures.

Step 2: Calculate the HPR for each holding period.

Step 3: Find the compound annual rate that would have produced a total return equal to

the return on the account over the 2-year period.

This is the geometric mean return, which we examine in more detail later. This allows us to

express the time-weighted return as an annual compound rate, even though we have two

years of data. In the investment management industry, the time-weighted rate of return is
the preferred method of performance measurement, because it is not affected by the

timing of cash inflows and outflows.