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Money Weighted Rate of Return

Money Weigthed Rate of Return is also known as the Dollar Weighted Rate of Return in the US. It uses the IRR formula calculation as described in the previous section. In the Money Weighted Rate of Return, the formula places more weightage on the period where more money is invested. If more money is invested in an unfavourable time, it will lower the overall Money Rate of Return. Likewise, more money is invested in a favourable time, it will increase the Money Rate of Return.

Consider the scenario where an investment manager performed very well in the past few years but only average this year. And you decided to further invest a significant amount of money this year to him. This will further lower his Money Weighted Rate of Return as more money this year means that the formula calculation will put more “emphasis” on the returns this year. This is considered unfair to the investment manager. We thus require a Rate of Return which we can judge without the bias in weightage of money. This is explained in the next section Time Weighted Rate of Return.

You may want to refer to the Money Weighted Rate of Return in the Rate of Return.xls spreadsheet.

Next :
Time Weighted Rate of Return

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