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(d) A fund held by an investment manager had a value of RM2 million on 1...

(d) A fund held by an investment manager had a value of RM2 million on 1 January 2019. RM2.5 million was invested on 1 May 2019. Immediately after this investment, the value of the fund was RM2.1 million. At the close of business on 31 December 2019, the value of the fund was 4.2 million.

(i) Calculate the time-weighted rate of return for 2019.

(ii) Calculate the dollar-weighted rate of return for 2019.

(iii) Comment on your answers to part (i) and (ii)

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Answer #1

III-) The money-weighted rate of return is sensitive to the amount and timing of cash flows and could lead to an unfair rating of the fund manager because they have no control over the amount or timing of cash flows. This effect is eliminated by the time-weighted rate of return. The money-weighted rate of return would only be superior to the TWRR if and only if the fund manager had complete control over cash flows and their timings.

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