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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Money-weighted and Time-weighted Rates of Return

Definition

The money-weighted rate of return earned by a fund is the same as the internal rate of return – i.e. the interest rate which it is necessary to use when discounting all the cashflows of the fund, including the initial cashflow, withdrawals, additions and income, to achieve a zero net present value (NPV).

The time-weighted rate of return is the rate earned by a fund calculated by compounding the absolute returns achieved over each consecutive period marked by the withdrawal of money from the fund or the addition of new money to it.

How is it used?

Money-weighted rate of return

An internal rate of return is sometimes known as a money-weighted rate of return, because the rate so calculated ...

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