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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

Which method of return calculation removes the effect of timing and size of client cash flows, making it suitable for comparing portfolio managers?

The time-weighted rate of return is correct. It links sub-period returns between cash flows, so the timing and size of client deposits or withdrawals, which the manager does not control, do not distort performance comparisons between managers.

  1. ATime-weighted rate of returnCorrect
  2. BAbsolute return on opening value
  3. CMoney-weighted rate of return
  4. DSimple average of year-end balances

Explanation

Time-weighted return breaks the period into sub-periods around cash flows and links them, so the manager's performance is isolated from the client's inflow and outflow decisions. Money-weighted return is affected by those cash flows.

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