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

Ms. Kapoor invested Rs 1,00,000 in a fund. At the end of year 1 it was worth Rs 1,20,000. She then added Rs 30,000 (so the value became Rs 1,50,000), and at the end of year 2 the value was Rs 1,65,000. What is the time-weighted annualised return over the two years, approximately?

Time-weighted return chains the sub-period returns, ignoring the timing of the Rs 30,000 addition. Year 1 gave 20% and year 2 gave 10%, so the two-year growth factor is 1.32. Its square root minus one is about 14.9% annually, lower than the 15% simple average.

  1. AApproximately 14.9%Correct
  2. BApproximately 15.0%
  3. CApproximately 13.0%
  4. DApproximately 16.5%

Explanation

Year 1 return = 20%. Year 2 return = 1,65,000/1,50,000 - 1 = 10%. Growth factor = 1.20 x 1.10 = 1.32. Annualised = sqrt(1.32) - 1 = 1.1489 - 1 = about 14.9%. The 15% option is the simple arithmetic mean of 20% and 10%, which ignores compounding. The 13% and 16.5% options come from mis-weighting the cash flow.

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