Explanation:
Explanation:
The time-weighted rate of return (TWRR) measures the compound growth rate of $1 initially invested over the measurement period. It is calculated by taking the geometric mean of the holding period returns (HPRs).
HPR for Year 0 to Year 1:
$100$110 (price of the second share) + $10 (dividend) = $120$120 - $100) / $100 = 20%HPR for Year 1 to Year 2:
$220 (value of two shares at $110 each)$230 (proceeds from selling two shares)$230 - $220) / $220 ≈ 4.545%Annualized TWRR:
Option A (9.7%) is incorrect because it represents the money-weighted rate of return (MWRR), which is similar to the internal rate of return (IRR). Option C (12.3%) is incorrect as it calculates the arithmetic average of the HPRs, not the geometric mean required for TWRR.
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An investor summarizes end-of-year cash outlays and proceeds from a two-year investment in a company's shares as follows:
Year | Outlays | Proceeds
0 | $100 to purchase the first share | ---
1 | $110 to purchase the second share | $10 dividend received from first share (not reinvested)
2 | --- | $230 received from selling two shares at $115 per share
The annualized time-weighted rate of return of the investment over the two-year period is closest to:
A
9.7%.
B
12.0%.
C
12.3%.