Capturing Cash Flows

B

The correct answer is C. Time-weighted returns.

When evaluating an investment portfolio, it's important to measure the performance of the portfolio over a specific period of time. The cash flows that occur during that evaluation period can have a significant impact on the overall return of the portfolio.

Time-weighted returns measure the performance of the portfolio over a specific period of time, while excluding the impact of any cash flows that occur during that period. In other words, time-weighted returns only take into account the investment returns earned by the portfolio during the evaluation period, and do not factor in any cash inflows or outflows that occurred during that time.

On the other hand, dollar-weighted returns, also known as internal rate of return (IRR), capture the impact of cash flows on the overall return of the portfolio. Dollar-weighted returns take into account the timing and magnitude of cash inflows and outflows in the portfolio, and provide a measure of the actual return earned by the investor over a specific period of time.

Actual diminishing returns is not a measure of cash flows during the evaluation period, but rather a concept related to the law of diminishing returns, which states that as additional units of a factor of production (such as labor or capital) are added to a fixed amount of other factors of production, the marginal product of the additional units will eventually decrease.

Opportunity cost returns are a measure of the returns that could have been earned by investing in an alternative investment opportunity with similar risk characteristics. This measure takes into account the potential returns forgone by investing in the chosen portfolio instead of the alternative opportunity.

In summary, time-weighted returns capture the investment returns earned by the portfolio over a specific period of time, while excluding the impact of any cash flows that occur during that period.