Answer: money-weighted rate of return will tend to be elevated.

## Explanation The time-weighted return (TWR) measures the compound growth rate of $1 initially invested in the portfolio over a stated period. It is calculated by taking the geometric mean of the holding period returns for each sub-period, which eliminates the effect of cash inflows and outflows. **Key points:** - **Time-weighted return** is unaffected by cash flows - it reflects only the investment manager's performance - **Money-weighted return** (also called internal rate of return or IRR) is affected by the timing and size of cash flows When funds are contributed just before favorable performance: 1. The **money-weighted return** will be **elevated** because the new money participates in the good performance 2. The **time-weighted return** remains unchanged because it's calculated independently of cash flows **Why option B is correct:** - The money-weighted return gives more weight to periods when more money is invested - Adding funds before good performance means more money earns the high returns, boosting the overall IRR - This creates a positive bias in the money-weighted return **Why option A is incorrect:** - Money-weighted returns would be depressed if funds were added before poor performance - Adding funds before good performance has the opposite effect **Why option C is incorrect:** - Time-weighted returns are not affected by cash flows at all - They measure the manager's skill independently of investor contributions/withdrawals **Practical implication:** - Time-weighted return is preferred for evaluating investment manager performance - Money-weighted return is better for measuring investor's actual experience - The distortion described is why CFA Institute recommends TWR for performance reporting

Author: LeetQuiz Editorial Team