Mary Nesbitt has an investment account with a beginning value, some cash inflows during the month and some ending value at the end of the month. Why is TWRR the accurate measure of return if it doesn’t consider the cash inflows? MWRR does takes into account the irregular cash inflows and calculate the rate of return thereon. Why is MWRR not superior in this case?
I’m super frustrated because this is once again the case when I thought I understood something just to be proven completely wrong by the correct answer.
TWRR removes the cash inflow and outflows, thereby providing a return that represents the investment manager’s abilities… rather than Mary’s cash flow needs.
If you’re trying to measure the performance of Mary’s investment, then MWRR is appropriate.
If you’re trying to measure the performance of the portfolio manager, then TWRR is appropriate. MWRR is inappropriate here because it will be influenced by the cash flows to and from Mary, over which the portfolio manager has no control.