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

Which statement about time-weighted rate of return (TWRR) is correct?

Time-weighted return is the preferred measure for comparing portfolio managers because it neutralises the timing and size of client contributions and withdrawals. It links sub-period returns geometrically, so it reflects manager decisions, unlike money-weighted return, which is affected by cash flows.

  1. AIt is affected by the timing and size of investor cash inflows and outflows
  2. BIt is the preferred measure to compare the skill of different portfolio managersCorrect
  3. CIt equals the internal rate of return of all cash flows
  4. DIt can only be computed for a period of exactly one year

Explanation

TWRR removes the effect of external cash flows by chaining sub-period returns, so it reflects the manager's decisions rather than the investor's timing. That makes it suitable for comparing managers. The first and third options describe money-weighted return (IRR). TWRR can be computed for any period.

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