Explanation:
The time-weighted rate of return (TWR) measures the compound growth rate of $1 initially invested in the portfolio. It requires calculating the holding period return (HPR) for each sub-period between cash flows.
Period 1 (Jan 1, 2016 to Dec 31, 2016):
Beginning value (P0) = $60
Ending value before cash flow (P1) = $75
Dividend received (D1) = $5
HPR1 = (P1 - P0 + D1) / P0 = (75 - 60 + 5) / 60 = 20 / 60 = 33.33%
Period 2 (Jan 1, 2017 to Dec 31, 2017):
Beginning value (P1) = $75
Ending value (P2) = $90
Dividend received (D2) = $5
HPR2 = (P2 - P1 + D2) / P1 = (90 - 75 + 5) / 75 = 20 / 75 = 26.67%
Cumulative Time-Weighted Return (Unannualized): TWR = [(1 + HPR1) * (1 + HPR2)] - 1 TWR = [(1 + 0.333333) * (1 + 0.266667)] - 1 TWR = (1.333333 * 1.266667) - 1 = 1.688889 - 1 = 0.688889, or 68.88%.
The unannualized time-weighted return is exactly 68.88%.
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Q.19 David Parker is a portfolio manager at Krempton Investment, an asset management company managing the investments of high-net-worth individuals. For the firm, David purchased 500 shares of Yamacha Petroleum for $60 per share on January 1st 2016 and another 500 shares at $75 on January 1st, 2017. The stock paid a dividend of $5 per share on December 31st 2016 and another $5 per share on December 31st 2017. Also, on December 31st 2017, David sold all of his shares for $90 each. Given this information, the time-weighted rate of return on the investment is closest to:
A
29.94%
B
33.33%
C
26.66%
D
68.88%