CFA Level I · CFA Level I Exam · Types of Financial Returns
An investor has a portfolio worth 200,000 that earns 5% in the first half-year. After the first half-year, the investor withdraws nothing and adds nothing. In the second half-year, the portfolio earns 10%. The annual time-weighted return is closest to:
The time-weighted return is found by compounding the sub-period returns: 1.05 times 1.10 equals 1.155, so the return is about 15.5%. Simply adding the two returns would ignore compounding.
- A7.5%
- B15.5%Correct
- C17.0%
Explanation
With no flows, link the sub-period returns: 1.05 x 1.10 = 1.155, so the return is 15.5%. The 7.5% option averages the returns arithmetically and halves them, and 17.0% is wrong because it adds 5% and 10% and adds extra.
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