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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A fund starts the year at 100, receives a client inflow of 100 at the end of month 6 when its value is 110 (before the inflow), and ends the year at 231. What is the time-weighted return for the year?

The time-weighted return is 21.0%. It links the sub-period returns, removing the effect of the cash flow: the first half gives 10% and the second half gives 231/210 minus 1, or 10%, so 1.10 times 1.10 minus 1 equals 21%.

  1. A10.0%
  2. B15.5%
  3. C21.0%Correct
  4. D15.0%

Explanation

First half return = 110/100 - 1 = 10%. After the inflow the value is 210, and the second half return = 231/210 - 1 = 10%. Time-weighted return = 1.10 x 1.10 - 1 = 21.0%. The 15.5% is a dollar-weighted approximation, and 10% only counts one sub-period.

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