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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

In performance measurement, the 'time-weighted rate of return' (TWRR) is preferred for evaluating a portfolio manager mainly because it:

Time-weighted return is preferred for judging a manager because it removes the effect of the timing and size of client deposits and withdrawals, which the manager cannot control. It links sub-period returns geometrically, whereas the money-weighted return is influenced by those cash flows.

  1. AIs unaffected by the timing and size of client cash inflows and outflowsCorrect
  2. BGives greater weight to periods in which the portfolio was larger
  3. CIs always higher than the money-weighted return
  4. DIgnores the effect of compounding across sub-periods

Explanation

TWRR links sub-period returns geometrically, so the timing and size of external cash flows, which the manager does not control, do not distort it. Money-weighted return (IRR) is affected by such flows. The claim that TWRR is always higher is false; the two can differ in either direction.

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