Is dollar-weighted return the same as money-weighted return?

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AcadiFi · Accepted Answer

Yes, dollar-weighted return (DWR) and money-weighted return (MWR) refer to the same concept — both are the internal rate of return (IRR) of a portfolio's cash flow stream. The two terms are used interchangeably in finance literature and in the CFA curriculum. 'Money-weighted' is more common in CFA Institute materials and international contexts; 'dollar-weighted' is more common in US-centric textbooks. The shared idea: calculate the return r that makes the present value of all cash flows zero, where cash flows include the initial investment, subsequent contributions and withdrawals, and the ending portfolio value. ```mermaid flowchart LR CF0[Initial
Investment] --> R[IRR
Solves] CF1[Contributions] --> R CF2[Withdrawals] --> R MVE[Ending
Value] --> R R --> DWR[DWR = MWR] ``` Where you might see subtle distinctions: in academic retirement research, 'dollar-weighted' sometimes emphasizes the weighting by dollar amounts invested at different times. A study by Dichev (2007) showed that dollar-weighted equity returns earned by actual investors are consistently lower than buy-and-hold returns, due to investors chasing performance and investing larger sums near market peaks. This 'behavioral gap' is a classic argument against trying to time markets. Practical example: Corvina Investments launches a fund that earns 10% per year for five years (TWR). However, most investors subscribed after two years of strong performance, only to suffer the average 10% return going forward. The collective dollar-weighted return experienced by actual investors is only 4.5% because so much capital missed the early years and was invested at high-water-mark prices. This gap between TWR and DWR reveals behavioral inefficiencies. Bottom line: treat DWR and MWR as synonyms. Both reflect the investor's actual experience given cash flow timing, in contrast to TWR which measures pure investment performance. Know both terms for the exam as questions may use either.

Is dollar-weighted return the same as money-weighted return?

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