Time Weighted Rate of Return vs. Money Weighted Rate of Return

Time weighted rate of return measures the compound rate of return over a given period for one unit of money.  Money-weighted rate of return, by contrast, measures the compound growth rate in the value of all funds invested in the account over the evaluation period.

MWR represents the average growth rate of all money invested, while TWR represents the growth of a single unit invested.

MWR is sensitive to the timing of external cash flows, whereas TWR is not affected.

Time-weighted return is the superior measure for evaluating managers with no control over the size or timing of cash flows. For example, a mutual fund manager would have no control over whether investors deposit or withdraw funds on any given day. In order to comply with Global Investment Performance Standards (GIPS)(R) returns must be presented on a time-weighted basis.

However, there are situations in which MWR might be a more appropriate measure. Private equity managers, for example, typically receive commitments from investors but do not accept the funds until they have an appropriate investment. Since they can control the size and timing of cash flows, it is more appropriate to judge them based on the money-weighted return.

For more information, see all articles on: Investment Returns, Portfolio Management

See also:
  • Money-Weighted Rate of Return
  • The Weighted Average Cost of Capital (WACC)
  • The Equity Discount Rate
  • Value Weighted Index
  • Macro Performance Attribution
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