Level 1 – Discounted Cash flow Application – Time Weighted Return

Hello – I have a question on this problem.

I understand the steps. but, the curriculum show that the final step is an annualized return by taking the Geometric mean.

They did not do that here in this question? so, when should i know to do the Geometric mean. i would have done it this way… ((1.24 * .10704 * 1.1250 * 0.96390)^1/4)-1.

Thank you so much.

Practice Q:

The following table shows the cash flows for a particular portfolio:

Amounts in USD Quarter 1 Quarter 2 Quarter 3 Quarter 4

Beginning balance 2,000,000 3,100,000 3,800,000 4,500,000

Beginning periodic inflow/(outflow) 500,000 450,000 200,000 (350,000)

Beginning balance 2,500,000 3,550,000 4,000,000 4,150,000

Ending balance 3,100,000 3,800,000 4,500,000 4,000,000

Which of the following is most likely the annualized time weighted return of the portfolio ?

A 43.93%.

B 8.47%.

C 9.50%.

Explanation:

A is correct. Calculate the holding period return for every period:

HPR = P1 – Po + D1 / Po = Ending value – beginning value + Cash flow / beginning value

Where:

Po = initial Investment

P1 = price received at the end of holding period

D1 = cash paid by the investment at the end of the holding period

Since the returns are for each quarter, we simply need to link the returns:

1.24 * .10704 * 1.1250 * 0.9639 = 1.4393.

The annualized time weighted return is equal to 43.93%.