Question: time-weighted return, dividend include or not?

Question

Hello everyone! While I was practicing on time-weighted rate of return, I noticed some questions would say "all dividends were reinvested in additional shares", others say "investor does not reinvest the dividends that he receives". What is the difference calculating time-weighted return? Do I include the dividend with HPR on the latter? Let me know your thoughts!

googs1484 · Answer

Dividends are important in the calculation for sure. For example, Lets say we buy one share of AAPL for $50 (that would be nice lol) on 1/1/20X1 and it pays a $1 dividend on 12/31/20X1 and has appreciated in value to 55$. The dividend was reinvested. We now have a capital gain of $5 ($55-$50) plus a dividend of $1. HPR is $55-$50 +$1/$50 - 1= 12%. Now for the HPR in 20X2 your starting point would be $56 because of the current price of $55 and then the $1 reinvested dividend. If the dividend WAS NOT reinvested your starting point for year 2 would be $55. The difference between it being reinvested or not reinvested is your initial starting point (denominator) for the HPR calculation in the following year. The TWRR is simply the geometric mean of the HPR's over the time period being measured. Hope that helps.