CFA Level I · CFA Level I Exam · Types of Financial Returns
An investment manager has no control over the timing or size of cash contributions and withdrawals made by clients. Which return measure is most appropriate for evaluating the manager's skill?
The time-weighted return is most appropriate, because it compounds sub-period returns and removes the impact of external cash flows. Since the manager cannot control client deposits and withdrawals, a measure unaffected by them best reflects the manager's skill.
- AMoney-weighted return
- BTime-weighted returnCorrect
- CHolding period return on initial capital
Explanation
The time-weighted return removes the effect of external cash flows by compounding sub-period returns, so it isolates the manager's performance. The money-weighted return is affected by the timing and size of client flows, which the manager does not control.
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