How do you handle when there are several inflows and outflows in a time series? For example a portfolio where you make yearly contributions and in some years make withdrawals as well?
Hey David, just watched the video and given the examples you showed us, if we use the prices and dividends from the TWR example converting to DWR, we would have a result of 0%, right? It would be something like (-10,00) in time 0, (1,00) dividend in time 1, (1,00) dividend and (8,00) in time 2, that is the current price of the stock. I don’t know if I’m being clear... 😅
Which is better for my mutual fund / stock investment MWR or TWR ? What is the exact use of TWR ? Is dollar weighted return is same as MWR (Money Weighted Returns)
Please don't confuse viewers unless you really know what you are doing. The second period's HPR = (8 + 1 - 12)/12 = -25%; the time-weighted return chains the HPR. Yes, I dragged the formula. Yes, it still works. The second period's HPR should ignore the first period's dividend; as I explain in the video, that's a key difference between the two measures.
@@bionicturtle Maybe I'm being thick - but the first dividend return is still a return on the 'portfolio', therefore should be included in the calculation of the 'portfolio' return in the second period. At least that's how I look at it. The arithmetic return on the second period should be (9/13)-1 = -30% rather than 25%. I'm having a hard time rationalising why it should be ignored - what am I missing For the benefit of the doubt and you being an expert after all - I redacted my comment in case im totally wrong so as to not confuse anyone
@@alaezitouni6033 right, thank you, but time-weighted return is not a measure of "portfolio" return (even that concept begs precision), see en.wikipedia.org/wiki/Time-weighted_return. Yes, the investor gets that first dividend dollar, but TWR evaluates each period on its own merits: if you invested at the start of the second period (after the first dividend was paid, at the end of the prior period!), your "holding period return" (aka, holding period yield) = (8 + 1 - 12)/12. Then TWR chains these together and therefore is indifferent to any particular investor's cash flow decisions. It's actually a logical way to evaluate performance irrespective of optional cash flow decisions. The other measure shown (IRR) behaves like you expect: it credits the dividend to the portfolio. BTW, I'm not such a big expert, i'm not that confident. Rather, I just cross-reference and check my calculations: so i'm using a template here that I've confirmed with several other examples. I lean on cross-referencing rather than a notion of my own expertise. I like to see the calculation confirmed by at least two different authors, FWIW.
It's interesting, because if $20 would have grown at 10.66% per year, for 2 years, it would be: $20*1.1066*1.1066 = $24.49 (But He actually got $23 after 2 year period).
agreed, interesting, but if (s)he buys the two shares and just holds until the end of two years, without selling one share in the meantime, then the IRR is zero! Because -20, +2, 18 exactly breaks even. The IRR is highly dependent on the buy/sell decisions
