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Published byDamon Watkins Modified over 8 years ago
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The time weighted rate of return 1 The portfolio received two cash flows during month t: 1.a contribution of EUR 30.000 on day 5 2.a contribution of 20.000 on day 16. We have a daily pricing system that provides us with values of the account of 1.045.000 and 1.060.000 on days 5 and 16 of the month, respectively. Final value is 1.080.000. We can calculate 3 separate subperiod returns using the rate of return computation:
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The time weighted rate of return 2 The TWR derives its name from the fact that each subperiod return within the full evaluation period receives a weight proportional to the length of the subperiod relative to the length of the full evaluation period.
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The money weighted rate of return 3 The MWR of the preceding example is found solving the following equation: There exists no closed-form solution for R. R must be solved iteratively. In this case r = 0.0009536. this is the portfolio’s daily rate of return during the month. In a monthly basis MWR is
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Sector weighting-Stock selection. 4 The health care industry sector represents 10% of a given benchmark (w b1 = 10%). The manager has decided to allocate 12% of its portfolio to this sector (w p1 = 12%). The return of the health care industry sector as weighted in the benchmark is r bj = 5%, it is r pj = 7% in the manager portfolio. The overall benchmark has a performance of r b = 3%.
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