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CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments

An investor deposits 1,000 at the start of Year 1. The account is worth 1,200 at the end of Year 1, just before a further deposit of 800. The account is worth 2,200 at the end of Year 2. The annualized time-weighted return is closest to:

The annualized time-weighted return is about 14.9%. Sub-period returns are 20% and 10%, which link to 1.32 cumulative growth, and the square root of 1.32 minus one gives 14.9%. The 32.0% figure is the unannualized cumulative return.

  1. A13.6%
  2. B14.9%Correct
  3. C32.0%

Explanation

Year 1 return = 1,200/1,000 − 1 = 20%. Year 2 return = 2,200/(1,200 + 800) − 1 = 10%. Cumulative growth = 1.20 × 1.10 = 1.32, so the annualized return = √1.32 − 1 = 14.9%. The 32.0% is the cumulative return, not annualized. The 13.6% is the money-weighted return.

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