Chapter 18, Problem 11CP

Summary Introduction

To calculate:

The time-weighted rate and dollar-weighted rate of return for a pension fund which is having initia invetsment of $\$500000$ and an another investment of $\$500000$ in the beginning of second year and is earning $15\%\text{ and }10\%$ in the first and second year respectively.

Introduction:

Time-weighted rates of return, also known as geometric return, is a return on investment which shows that how much return investor has earned every year over a period of investment. The reason for this name is the equal weight given to each return in the geometric average.

Dollar- weighted average return means rate of return of an investment, which takes effect into account the timimg of flows. Its is somewhere different from time-weighted rate of return. Dollar- weighted average return is somewhere similar to IRR.