Thus, the average of the three annual returns results in a time-weighted return
For this example, the following is used: a risk-free rate of 6%, the portfolio's time-weighted return
of 14.89% annually and standard deviation of 7.07%, and the benchmark return and standard deviation of 14.96% and 4.24%, respectively.
The time-weighted return for Riskco is the same for both Barry and Samantha.
Exhibit 4: Time-Weighted Return for Barry and Samantha Barry Year 1 ($150-$100)/ $100=50% Year 2 ($350-$150-$100)/($150+$100)= 40% Year 3 ($270-$350-$100)/($350+$100)= (40%) Time-weighted return: (1+.5)x(1+.4)X(1-.4)=(1+.26)=8.0% annualized Samantha Year 1 ($450-$300)/$300=50% Year 2 ($630-$450)/$450=40% Year 3 ($378-$630)/$630=(40%) Time-weighted return: (1+.5)X(1+.4)X(1-.4)=(1+.26)=8.0% annualized
Often underestimated by CPAs who offer, or are considering offering such services, the process of calculating and presenting investment performance often can be problematic and, in some respects, "counter-intuitive." This article focuses on an important, yet often misunderstood, aspect of the investment reporting process--calculating and presenting time-weighted returns for clients.
Powered by BI-SAM s best-in-class B-One performance calculation engine and underpinned by Broadridge s Investment Management technology, the solution provides complete performance reporting and absolute attribution analysis across multiple asset classes and dimensions of the business, including true time-weighted returns
at multiple levels, internal rates of return at fund level, benchmark comparisons and market segment decomposition.
Dean Altschuler (Bard Consulting, LLC) proposed a different technical approach to replace time-weighted returns
with dollar-weighted returns.
* Uses an outside auditing or verification entity to examine how its compliance procedures calculate total time-weighted returns
and ensures that the manager made appropriate disclosures and that their presentation of results complies with AIMR guidelines.
, as contrasted with dollar-weighted returns (also referred to as Internal Rate of Return), ignore the return impacts due to the timing of cash flows.