CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
Which statement about the money-weighted return is most accurate?
The money-weighted return is the internal rate of return on the investment's cash flows. It sets the present value of contributions equal to the present value of withdrawals and ending value. Geometric linking describes the time-weighted return, and cash flow timing does affect the money-weighted figure.
- AIt is the internal rate of return on the investment's cash flowsCorrect
- BIt is the geometric average of sub-period returns
- CIt is unaffected by the timing of cash flows
Explanation
The money-weighted return is the discount rate that sets the present value of inflows equal to outflows, which is the IRR. The geometric linking of sub-period returns describes the time-weighted return, and the money-weighted return is directly affected by cash flow timing.
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