Chapter 18, Problem 1PS

Summary Introduction

To calculate:

The dollar-weighted average return on monthly basis for a household saving account.

Introduction:

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

Answer to Problem 1PS

Cash flows either positive or negative or vice versa is divided by the total of of investment,through this dollar weighted average return for a particular period can be calcualted.

Explanation of Solution

Given Information:

The saving-account of a household and entries are on the first day of each month:

Month	Additions	Withdrawls	Value
January
February	$2500$
March	$4000$
April	$1500$
May	$13460$
June		$23000$
July	$3000$
August			$198000$

Household monthly Dollar Weighted Average Return can be calculated easily with the help of MS Office − Excel with the help of formulas. The calculations are shown under the snip of excel as attached below for reference:

  

The value of portfolio is calculated on monthly basis post taking the effects of with drawls and additions. The period of addition and with drawl in months is then converted into days to compute the weighted period and then the weighted average return is calculated.