MWRR vs TWRR | CFA Level I

Portfolio return measurement is crucial for evaluating the performance of investment portfolios. Three primary methods are employed to measure returns:

1. Money Weighted Rate of Return (MWRR): This approach considers the timing and amount of cash flows into and out of the portfolio. It is similar to the internal rate of return (IRR) for a series of cash flows.
2. Holding Period Return (HPR): HPR measures the return on an investment over a specific period. It calculates the total return received from holding an asset or portfolio of assets.
3. Time Weighted Rate of Return (TWRR): TWRR removes the effects of cash flows and focuses solely on the investment’s performance. It is useful for comparing the performance of fund managers because it is not affected by the timing and amount of withdrawals or contributions.

Key Concepts

• Subscriptions and Redemptions: These are cash flows into (subscriptions) and out of (redemptions) the portfolio, which affect the MWRR.
• Dividends/Coupons: Income received from the investments, which should be included in the return calculations.
• Account Value Changes: Fluctuations in the value of the portfolio over time, influenced by market movements, dividends, and other income, as well as subscriber contributions and redemptions.

EXAMPLE

Conclusion

Understanding the differences between MWRR, HPR, and TWRR is essential for accurately assessing the performance of investment portfolios. MWRR takes into account the specific timing and size of cash flows, making it ideal for individual investors. HPR is straightforward and useful for a single holding period. TWRR, on the other hand, provides a way to evaluate the performance of the investments themselves, independent of investor behavior, making it valuable for comparing fund managers or investment strategies.