Recommendations & StrategiesQuestion 74 of 110
When measuring investment performance, time-weighted return is preferred over dollar-weighted return when the goal is to:
a.Reflect the impact of the client's deposit and withdrawal timing
b.Measure the client's personal internal rate of return
c.Account for the size of external cash flows
d.Evaluate the performance of the portfolio manager independent of client cash flows
Explanation
Time-weighted return removes the distorting effect of client deposits and withdrawals, isolating the manager's investment performance for fair comparison. Dollar-weighted return, or internal rate of return, reflects the impact of cash flow timing and is better for measuring the investor's actual experience. The choice depends on what is being evaluated.
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