CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A portfolio manager has no control over the timing or size of client deposits and withdrawals. Which return measure is most appropriate for evaluating the manager's skill?
The time-weighted return is most appropriate. It neutralizes the effect of the timing and size of external cash flows, which the manager cannot control, so it reflects investment performance alone. The money-weighted return would be distorted by the clients' deposit and withdrawal decisions.
- AMoney-weighted return
- BTime-weighted returnCorrect
- CSimple average of the periodic cash balances
Explanation
The time-weighted return removes the effect of the size and timing of external cash flows, so it isolates the manager's investment decisions. The money-weighted return is influenced by client flows the manager does not control, so it is a poor measure of skill in this case.
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