Final answer:
The Time-weighted return is the weighted return that allows investors to compare the performance of two IAs by eliminating the impact of external cash flows, providing a pure measure of the investment manager's performance.
Step-by-step explanation:
When comparing the performance of two Investment Accounts (IAs), the Time-weighted return is used. This measure allows investors to compare the performance of two IAs irrespective of the size and timing of withdrawals and contributions. It provides a view of the compound rate of growth of one unit of currency invested in a portfolio over a specified time frame.
The time-weighted return eliminates the impact of external flows, making it a pure measure of the investment manager's performance. Unlike the net return and gross return, it does not get affected by the investor's individual actions. Also, it is different from the risk-adjusted return which takes into account the risk taken to achieve the return, a concept that is crucial in understanding the tradeoff between return and risk.
Investors often balance the potential for high returns against the risk of losses, a decision influenced by personal preferences and the context of different time frames. Understanding and using the correct measure of performance, like the time-weighted return, is essential for making informed investment decisions.