CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An investment consultant wants to compare the skill of several portfolio managers whose clients decide when to add or withdraw money. Which return measure is most appropriate for this comparison?
The time-weighted return is most appropriate because it removes the effect of the timing and size of client deposits and withdrawals. Managers do not control those flows, so this measure isolates their investment skill. The money-weighted return reflects client timing decisions and is less suitable for comparing managers.
- ATime-weighted returnCorrect
- BMoney-weighted return
- CAverage account balance return
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 an internal rate of return that depends on when the client adds or withdraws money, which the manager does not control.
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