Money-Weighted Rate of Return
Candlefocus EditorThe MWRR calculation sets the present value of all cash flows equal to the value of the initial investment. This means that all cash inflows, such as dividend payments, and outflows, such as withdrawals, are accounted for in the calculative process. The present value of all cash flows together with the initial investment value sets the money-weighted rate of return. In other words, the MWRR calculation puts into perspective the return of an investment based on when cash is taken out or put in to the account.
In the context of finance, the MWRR is often compared to the internal rate of return (IRR). This is because the MWRR is seen to be equivalent to the IRR. Both calculations seek to measure the rate of return on an investment by taking into consideration the timeline of deposited and withdrawn amounts. This is especially useful to investors when the dividends and capital gains are reinvested into the same account or investment.
In addition to individual investors, the MWRR calculation is also used by portfolio managers for risk analysis and performance evaluation. By utilizing the MWRR calculation portfolio managers are able to more accurately assess the performance of their investments when any cash changes are made.
In conclusion, the money-weighted rate of return (MWRR) is a performance measurement that is used to assess the rate of return of an investment over a specified period of time. The MWRR showcases the performance return when taking into account individual deposits, withdrawals, and other cash flows. The MWRR calculation sets the present value of all cash flows equal to the value of the initial investment. The MWRR is often compared to the internal rate of return (IRR) because of their similarities. The MWRR calculation is an effective tool for individuals investors as well as portfolio managers to evaluate the performance of an investment or account.