When a cash inflow was received before the lower second period return, mwr will be lower than twr…why??
twr looks at (END of Period / Beginning of Period)^(1/No of Periods)
So only End of period amount and Beginning of Period amount and # of periods matter.
intermediate cash flows have NO impact on TWR.
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For MWR - you received money at the beginning of the 2nd Period, it earned a lower return.
2nd Period HPR = (End Period / Beg Period (now higher number)) --> will show the effect of the lower return.
So even though you started with the same sum of money - the 2nd period lower return affects the MWR.
The money was received in the first period. Even though second period has lower return, first period has higher return, wouldn’t the high return offset the low return a bit!
Try it with some numbers:
- Deposit $100, earn 10%
- Deposit another $100, earn 5%
The time-weighted return is √(1.1 × 1.05) − 1 = 7.4709%
The money-weighted return is the IRR when the cash flow are −100, −100, +220.50, or 6.6844%.
If you think about it, it makes sense: the time-weighted return gives equal weight to the 10% return and the 5% return; the money-weighted return gives (roughly) twice the weight to the 5% return as it does to the 10% return.
I know it is an old thread but I have a question regarding the discussion.
Is not the equation of the TWR= (MV1-CF-MV0)/MV0 (in case cashflow is at T=1)
is not in this case, the cashflow is deducted from the total value and thus draging total return downwards or am I missing something out?