Question

Consider an investment fund that starts out with £180,000. After one year, the value of the fund is £194,000. The investor deposits an additional £21,000 to the fund. After a second year, the value of the fund is £212,000. The investor withdraws £49,000. After a third year, the value of the investment fund is worth £176,000.

Compute the money-weighted rate of return ___%
Enter a percentage correct to 1 decimal place Compute the time-weighted rate of return ____%
Enter a percentage correct to 1 decimal place

Answer 1

While the money-weighted and time-weighted rates of return are essential for evaluating investment performances, without additional information, the exact percentage cannot be calculated. The concept of saving early and benefiting from compound interest, as demonstrated with an initial investment of $3,000 growing at 7% annually, highlights the significant impact of time on investments.

Step-by-step explanation:

The money-weighted rate of return (MWRR) and the time-weighted rate of return (TWRR) are methods used to evaluate the performance of financial investments, taking into account deposits and withdrawals. Calculating MWRR involves finding an internal rate of return (IRR) that equates the present value of cash flows (deposits and withdrawals) with the final value of the investment. On the other hand, TWRR is a compound growth rate that measures the performance of a fund's investments irrespective of the timing and size of cash flows. Unfortunately, without more data or a more clear timeline of cash flows, it is not possible to provide an accurate calculation of these rates of return.

Remember that saving early in life and harnessing the power of compound interest can substantially increase your investment over time. For example, starting with $3,000 and assuming a 7% real annual rate of return, you could grow your investment fifteen fold in 40 years. This demonstrates the importance of starting early and choosing investments wisely.