MWR: Money-weighted rate of return and TWR: Time-weighted rate of return (for the @CFA Level 1 exam) explores the two method of computing portfolio performance and their application.
Your videos are a god send , but I am having trouble grasping the concept of why irr is mwr.. is there a video on your page talking about the conceptual aspect of this topic ? Thank you again
There is another video on this topic in the Member's section but it does not really explain all that much more :) Simply put, the MWR is the IRR. That's what it's designed to be.
so, TWR is some sort of CGAR in future ? is there any place where we use arithmetic mean for calculation of return or do we always use geometric mean ?
Hello, can I please ask for the TWR when you calculated the HPR for year 2 why did you not add 20 for the dividends? Didn’t you have two shares by the end of period 2?
Yes, we had two shares, that's true. But computing the HPR for the period would be the same if I based it on a single share or two shares. In this example I computed everything on the basis of a single share (beginning and end of period prices as well as the dividend are stated on a per share basis). The TWR is not sensitivite to how big the investment really was, which is why you can take these shortcuts.
Question: 1: Shouldn't the CF0 be the beginning stock acquisition + the end year purchase (it still in the first year) ? 2: If I am wrong on the first question, then shouldn't the CFO be $140 because she bought one at the beginning of the year? 3: On the calculator why didn't you insert a F01? the frequency of cash flow?
as I understand, CF0 represents the cash flow at the beginning of year one (outflow is negative, inflow is positive), she used $150 to buy a share (she spent $150) => outflow = -150. The end-year 1st purchase is considered as the beginning of the 2nd year's purchase.
Yes, CFO is the cash flow at the beginning of the period (not to be confused with Year 1). You need to keep this cash flow separate from anything that happens at the end of the first year (C01). You only input anything for frequency when a cash flow occurs more than once. By default it is set to 1 (one-time occurence), so you can leave it untouched.
@8:55, shouldn't P1 = 180? So the starting value of the second period should correspond to the ending value of the first period? Thanks for clarification!
Hi Patrick, well that would only be the case if we assumed that the first dividend - D1 were reinvested. The assumption here is that the dividend is cashed out so what the investor has in the portfolio going into year 2 is a stock worth 170. Please assume this logic in CFA Level 1 questions unless told otherwise👍
@@letmeexplaincfa first of all, thank you for the explanation, simple and clear, sir. But I thought the same thing, and was thinking that this "not reinvisted dividend" can be interpreted as distributed by the porfolio manager to investers in which case the calculation makes perfect sense, but if we interpret that the manager makes a choice not to reinvest but use this dividend to increase the fund's cash position (let's say the manager foresses that some investment oportunity is likely to be available soon), then it seems to me that the dividend should be considered in the value of the initial position of the second year. Do you agree?
@@SchmittJoao Yes, you are correct. If the dividend had stayed in the fund and were reinvested then it would increase the opening balance for the next year.
