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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A PMS investor invests Rs 10,00,000 at the start of the year. It grows to Rs 12,00,000 at the end of year 1. The investor then adds Rs 4,00,000, bringing the value to Rs 16,00,000 at the start of year 2, and the portfolio ends year 2 at Rs 17,60,000. What is the time-weighted return for the two years combined (cumulative)?

The cumulative time-weighted return is 32%. Year 1 returned 20% and year 2 returned 10% on the post-contribution base, and compounding gives 1.20 x 1.10 - 1 = 32%. This removes the distorting effect of the investor's Rs 4 lakh cash inflow.

  1. A10.0%
  2. B32.0%Correct
  3. C76.0%
  4. D10% per annum only

Explanation

Year 1 return = 12/10 - 1 = 20%. Year 2 return is measured on the Rs 16,00,000 starting value: 17.6/16 - 1 = 10%. Cumulative = 1.20 x 1.10 - 1 = 32%. The 76% option divides the final value by the original Rs 10 lakh and ignores the Rs 4 lakh added, and so mixes in the new money. The 10% option considers only year 2.

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