Dollar-weighted returns, also known as the internal rate of return (IRR), is a performance measure that considers the timing and amount of cash flows in a portfolio. It is particularly useful for evaluating the performance of investments with irregular cash flows, such as mutual funds or individual stocks. Dollar-weighted returns provide a more accurate reflection of an investor's experience as they consider the impact of cash inflows and outflows on the overall return.
Which performance measure takes into account the timing and amount of cash flows in a portfolio?
Not Correct
Correct!
Select an option above to see an explanation here.
A) Time-weighted return does not consider the impact of cash flows on the overall return. B) Simple rate of return only considers an investment's initial and final values without accounting for cash flows. C) Dollar-weighted return considers the timing and amount of cash flows in a portfolio. D) Annualized return converts a return over a non-annual period to an annualized rate.
What is another term for dollar-weighted return?
A) Time-weighted return is a different performance measure that does not consider the impact of cash flows on the overall return. B) Simple rate of return is another performance measure that only considers an investment's initial and final values without accounting for cash flows. C) Internal rate of return (IRR) is another term for dollar-weighted return. D) Geometric mean return is a performance measure that calculates the average return over multiple periods, considering compounding effects.
Which of the following is NOT considered when calculating dollar-weighted returns?
A) Timing of cash flows is considered when calculating dollar-weighted returns. B) Amount of cash flows is considered when calculating dollar-weighted returns. C) Discount rate is used to calculate the present value of future cash flows, which is considered when calculating dollar-weighted returns. D) Compounding effects are not considered when calculating dollar-weighted returns, as they are more relevant for geometric mean returns.
In the late 1990s, a popular mutual fund experienced significant inflows and outflows due to its high returns. Investors who entered and exited the fund at different times had varying experiences, with some earning high returns and others losing money. The dollar-weighted return of the fund provided a more accurate reflection of the investors' actual experiences, as it took into account the timing and amount of their cash flows.
Become a Pro Member to see more questions
Example Series 65 Example Practice Question
An investor purchases shares of a mutual fund at different times and in varying amounts. Over the course of a year, the investor experiences a mix of gains and losses. By calculating the dollar-weighted return, the investor can determine their actual performance, considering the timing and amount of their investments.
- Dollar-weighted return: Dollar-weighted return is a measure of an investment's performance that takes into account the timing and amount of cash flows. It is also known as the internal rate of return (IRR) and represents the rate at which an investment breaks even in terms of net present value (NPV).
- Dollar-weighted return example: An investor makes an initial investment of $10,000 and then adds $5,000 after one year. After two years, the total value of the investment is $18,000. The dollar-weighted return considers the timing and amount of the cash flows, resulting in a more accurate representation of the investment's performance.