Explanation

The correct answer is B.

Time-Weighted Rate of Return (TWRR) is a performance measurement method that:

1. Eliminates the effect of cash flows - TWRR is NOT affected by the timing or amount of cash flows into or out of the portfolio (making option A incorrect).

2. Measures compound growth rate - TWRR calculates the geometric mean of returns over multiple periods, effectively measuring the portfolio's compound growth rate independent of external cash flows (making option B correct).

3. Comparison with Money-Weighted Rate of Return (MWRR):

   • TWRR is generally preferred for evaluating portfolio manager performance because it removes the impact of client-directed cash flows.
   • MWRR (also known as Internal Rate of Return) IS affected by the timing and amount of cash flows.
   • There's no consistent relationship where TWRR is always lower than MWRR - it depends on the timing of cash flows relative to market performance (making option C incorrect).

Key Differences:

• TWRR: Measures portfolio manager's investment skill by eliminating cash flow effects
• MWRR: Measures investor's actual experience including their cash flow timing decisions

Calculation: TWRR = [(1 + R₁) × (1 + R₂) × ... × (1 + Rₙ)]^(1/n) - 1 Where R₁, R₂, ..., Rₙ are sub-period returns between cash flows.