CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
The money-weighted return and the time-weighted return of an account are most likely equal when:
The two measures are most likely equal when the portfolio has no external cash flows during the period. With no deposits or withdrawals there is only one sub-period, so the internal rate of return and the linked holding-period return coincide. Offsetting flows or a longer horizon do not guarantee equality.
- Acontributions equal withdrawals
- Bthe investment horizon exceeds one year
- Cthe portfolio has no external cash flows during the periodCorrect
Explanation
Without external cash flows there is a single holding period, so the internal rate of return and the geometrically linked sub-period returns give the same result. Offsetting contributions and withdrawals at different times still change the weights, and a longer horizon does not force equality.
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