Question

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio?

A)Dollar-weighted return
B)Time-weighted return
C)Dollar cost averaging
D)Discounted cash flow

Answer 1

The correct method for calculating the internal rate of return by portfolio managers without the influence of external cash flows is the Time-weighted return. This metric allows for the proper assessment of a manager's performance because it is not skewed by the timing of deposits or withdrawals by investors.

Step-by-step explanation:

The method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio is B) Time-weighted return. This measure removes the effects of external cash flows and allows for the evaluation of the investment manager's performance based on the actual investment decisions made. The time-weighted return is particularly useful when comparing the performance of portfolio managers because it is not affected by the timing of investor deposits or withdrawals, which the manager typically cannot control.Other options, such as Dollar-weighted return may be influenced by investor cash flows, Dollar cost averaging is a strategy for investing, and Discounted cash flow is a valuation method, not a performance metric.

The actual rate of return refers to the total rate of return received on an investment, which includes capital gains and interest earned during a specific time period.To make investment decisions, financial investors must consider an appropriate interest rate that reflects the opportunity cost of investing financial capital and any additional risk associated with the investment. This selected interest rate plays a crucial role in the valuation of future payments and the calculation of discounted cash flow, a technique that can be used for investment appraisal.

Answer 2

The Time-weighted return (TWR) B) is used to determine the internal rate of return without the influence of investor deposits or withdrawals, as it measures portfolio performance independently of external cash flows to showcase the investment manager's performance.

Step-by-step explanation:

The method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals from the portfolio is the Time-weighted return (TWR). The TWR measures the compound rate of growth in a portfolio by taking into account external cash flows, like deposits and withdrawals, by breaking the return calculation into sub-periods at each cash flow event. By doing so, it effectively removes the distorting effects that additional funds or withdrawals might have on the actual rate of return.

As opposed to the Dollar-weighted return, which does account for the timing and size of external cash flows, the Time-weighted return provides a measure of the manager's investment performance that is not affected by the investor's individual transactions. Dollar cost averaging is an investment strategy rather than a return calculation method, and Discounted cash flow is a valuation method to estimate the value of an investment based on its expected future cash flows.