time-weighted return

Also found in: Acronyms.

time-weighted return

A rate-of-return measure of portfolio performance that gives equal weight to each period included in the study regardless of any differences in amounts invested in each period.
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Thus, the average of the three annual returns results in a time-weighted return of 8.2%.
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.
Time-weighted returns, 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.
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