Question

What is the comparison and contrast between Dollar-weighted returns and Time-weighted returns?

Answer 1

The time weighted return measures the compounded growth of a dollar over a specified period of time. Whereas, dollar weighted return is also called internal rate of return because it accounts for timing and amount of all cash flows in and out of the portfolio.

In contrast to dollar weighted rate, time weighted rate is not affected by cash withdrawals and additions to the portfolio.

Time-weighted returns split up the time for which a return is going to be calculated into equal sub-periods. dollar weighted return does not split up the time period into equal sub-periods; instead it searches for a constant rate of return for one entire time period.