{"id":4189,"date":"2024-11-01T12:29:46","date_gmt":"2024-11-01T11:29:46","guid":{"rendered":"https:\/\/valueinvestments.ch\/lexikon\/the-capital-weighted-return-mwr\/"},"modified":"2025-01-08T23:18:51","modified_gmt":"2025-01-08T22:18:51","slug":"money-weighted-rate-of-return-mwr","status":"publish","type":"lexikon","link":"https:\/\/valueinvestments.ch\/en\/lexicon\/money-weighted-rate-of-return-mwr\/","title":{"rendered":"Money weighted Rate of Return"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">An investment&#8217;s money-weighted rate of return (MWR) is a <strong>measure of its performance<\/strong>. In order to calculate the MWR, <strong>the present value of all cash flows is equated with the original investment&#8217;s value<\/strong>. Consequently, the MWR is equivalent to the Internal Rate of Return (IRR). <strong>MWR includes the amount and timing of the inflow and outflow of funds<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The Calculation of the Money-Weighted Rate of Return<\/strong> <\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In order to calculate the MWR, the following formula is used. Calculating the MWR (or IRR) <strong>requires the use of trial and error<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">By <strong>taking into account the level and timing of cash flows<\/strong>, this method of measuring the <a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/return-on-assets\">return on assets<\/a> provides a good indicator of portfolio performance. Accordingly, the MWR (or IRR) is the discount rate at which the net present value (NPV) is zero. It is therefore worthwhile to <strong>invest if the <\/strong><a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/return-on-investment\"><strong>return on investment<\/strong><\/a><strong> exceeds zero<\/strong>. This means that the present value of inflows equals the present value of outflows.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh7-rt.googleusercontent.com\/docsz\/AD_4nXe5E9sUKwVqqHnh23QdicqQzKK2TPrTOhPQyaJA8ty83z5SVFdxbWomGPpK4Ai4tUY6hTFzUcBAjFeu3zJjR1-MZfNN9Vv0ezsxES4G4HSo5JDvG3skUSGK_QDrIAvaONsCqLHwZg?key=7CTosXOBc24HSEzzIgc3UcfG\" alt=\"Illustration of the formula for calculating the money-weighted rate of return(MWR)\" title=\"\"><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>where:<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>PVO = Present Value Outflows<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>PVI = Present Value Inflows<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>CF0 = Initial Cash Investment (Cash Flow Period 0)<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>CFn = Cash Flow Period n<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>IRR = Initial Rate of Return<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Example of the Calculation of the Money-Weighted Rate of Return<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A discount rate (r) must be applied to each inflow or outflow so that <strong>PV (inflow) equals PV (outflow)<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Consider the case of an investor who buys a stock for CHF 100. The investor receives a <a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/dividend\">dividend<\/a> of CHF 2 in the first year and a dividend of CHF 4 in the second year. Afterward, the investor sells the stock for CHF 120. Generally speaking, the MWR is defined as the rate that meets the following equation. By using a financial calculator, we can solve the equation for r and determine that the MWR is 8.2%.<\/p>\n\n\n\n<figure class=\"wp-block-image is-resized\"><img decoding=\"async\" src=\"https:\/\/lh7-rt.googleusercontent.com\/docsz\/AD_4nXcD56VHXr3cgE_MMBtZzyIGMTlmY2zjwWDXdS0qBMuBQtg2wf-ZXP_jbinc3PVwHKyQSaPfbdu45tICzut_eInyyO4IEbCDWp5uMQD4NCrgH2G64cyWQQ50yRFZ9SsOU-JCeGiLIA?key=7CTosXOBc24HSEzzIgc3UcfG\" alt=\"Illustration of the example for the calculation of the money-weighted rate of return (MWR)\" style=\"width:800px;height:auto\" title=\"\"><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Disadvantages of the Money-weighted Rate of Return<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">By using MWR, it is <strong>not possible to compare the performance of fund managers or <\/strong><a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/wealth-manager\"><strong>wealth managers<\/strong><\/a> when they do not influence cash flows. During times of high <a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/securities-portfolio\">portfolio<\/a> performance, MWR gives greater weight to the performance of the portfolio. This is the reason for the term &#8220;money weighted&#8221;.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Cash flows are generally beyond the control of wealth managers<\/strong>. Investors add or subtract money from the portfolio. If a large sum of money is added immediately before a positive performance, this will have a positive impact on the MWR. If, however, the portfolio suffers a loss after the addition of money, then the addition of money was deemed a negative action. For the purpose of comparing returns independent of time, the <a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/time-weighted-rate-of-return\">time-weighted rate of return<\/a> is suitable. Unlike the MWR, time-weighted returns are not affected by transactions. A MWR is calculated by taking into account money in- and outflows. This complicates the comparison of investment <a href=\"https:\/\/www.valueinvestments.ch\/en-gb\/rate-of-return\">returns<\/a>.<\/p>\n","protected":false},"template":"","class_list":["post-4189","lexikon","type-lexikon","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/valueinvestments.ch\/en\/wp-json\/wp\/v2\/lexikon\/4189","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/valueinvestments.ch\/en\/wp-json\/wp\/v2\/lexikon"}],"about":[{"href":"https:\/\/valueinvestments.ch\/en\/wp-json\/wp\/v2\/types\/lexikon"}],"wp:attachment":[{"href":"https:\/\/valueinvestments.ch\/en\/wp-json\/wp\/v2\/media?parent=4189"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}