CFA Level 1: Asset Valuation - Dollar-Weighted and Time-Weighted Returns

False Statement on Dollar-Weighted and Time-Weighted Returns

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Question

Kelly Windsor and Joe Agosti, expatriates working in Yemen, are studying for the Level 1 CFA examination. This week, they are focused on new concepts in the asset valuation material. While sitting on his balcony overlooking the desert, Agosti creates the following true/false question to test Windsor's knowledge of dollar- weighted and time-weighted returns. Which of the following statements did he make FALSE?

Answers

A. If a client adds funds to an investment during an unfavorable market, the time-weighted return will be lower than actual.

B. The dollar-weighted return applies the concept of internal rate of return (IRR) to investment portfolios.

C. The time-weighted return measures the compound rate of growth of $1 over a stated time period.

D. If the investment period is greater than one year, an analyst must use the geometric mean approach when using the time-weighted return method.

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Explanations

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A. B. C. D.

The time-weighted method is preferred because it is not affected by the timing of cash flows. This statement should read, "If a client adds funds to an investment during an unfavorable market, the dollar-weighted return will be lower than actual." The other statements are true.

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