Question

2) What is differences between time-weighted and dollar-weighted returns, geometric and arithmetic averages and have some idea when to use each.  
3) How do you gain a basic understanding of returns and risk of various asset classes and understand that securities that offer higher returns have higher risk.
4) How will you be able to construct portfolios of different risk levels, given information about risk free rates and returns on risky assets.

Answer 1

The time weighted rate of return measures the compound rate of growth for a portfolio. It assumes that reinvestments are made at the geometric rate instead of arithmetic total. The main difference between time weighted return and dollar weighted return is that the former does not take intermediate inflows and outflows into account. The former also divides the time under consideration into several equal sub-periods. This method is generally used by professional money managers so that they can separate their performance from the actions of the investors. However, individual investors should use dollar weighted rate of return as it provides more realistic view.