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CFA Level 1 CFA: Holding period, money-, and time-weighted returns

Nicole Seaman

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The holding period return (HPR) is given by [P(t) + D - P(0)]/P(0). The HPR does not account for the time interval, so importantly it is annualized; for example, a 15.50% HPR over 5 years is much less impressive than over one month. The time-weighted return (TWR) chains HPR together and is given by r(TWR) = [(1 + r_HPR1) * (1 + r_HPR2) * (1 + r_HPR3) + ... +(1 + r_HPRn)]^(1/n) -1, if the holding period returns happen to be annualized. The money-weighted return (MWR; aka, dollar-weighted return) is the internal rate of return (IRR) and therefore requires that we first correctly specify the stream of NET cash flows over the performance period.


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