Friday, July 01, 2005

Time-weighted rate of return

I used to be always interested in figuring out the rate of return shown on my fidelity 401K page. Well, now I know (thanks to my CFA studies): It is computed using the time-weighted rate of return. The other return commponly used is the money-weighted rate of return, which treats investments like cash flows and computes the IRR.

Definition: Geometric mean return
Also called the time-weighted rate of return, a measure of the compound rate of growth of the initial portfolio market value during the evaluation period, assuming that all cash distributions are reinvested in the portfolio. It is computed by taking the geometric average of the portfolio subperiod returns.


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