CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A fund earned a high return in a period when it held little capital and a poor return in a period when it held much more capital after large client inflows. Compared with the time-weighted return, the money-weighted return is most likely:
The money-weighted return is most likely lower. It weights periods by the amount of capital invested, so the poor return earned on the larger balance dominates. The time-weighted return weights the periods equally and therefore is higher than the money-weighted return here.
- AHigher
- BLowerCorrect
- CEqual
Explanation
The money-weighted return gives more weight to the periods when more money is invested. Because the poor return occurred when capital was largest, the money-weighted return is pulled below the time-weighted return, which weights each period equally.
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