CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A client makes a large contribution to a fund just before a period of weak fund performance. Over the full evaluation period, the client's money-weighted return is most likely:
The money-weighted return is most likely lower than the time-weighted return. It weights sub-periods by the amount invested, so a large contribution before weak performance gives that weak period extra weight. The time-weighted return weights each sub-period equally and ignores the contribution's size and timing.
- Alower than the time-weighted returnCorrect
- Bhigher than the time-weighted return
- Cequal to the time-weighted return because cash flows are external
Explanation
The money-weighted return gives more weight to periods when more money is invested. A large contribution before poor performance means the weak period carries heavy weight, pulling the money-weighted return below the time-weighted return, which weights each sub-period equally.
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