MWR and TWR are two different methods of calculating the portfolio's performance over a specific period. They stand for Money-Weighted Return (MWR) and Time-Weighted Return (TWR).
1. Money-Weighted Return (MWR):
MWR takes into account the timing and amount of cash flows in and out of the portfolio. It focuses on the overall return experienced by the investor, considering the impact of their individual contributions or withdrawals. MWR is also known as the internal rate of return (IRR) or the dollar-weighted return. It provides a measure of how the investor's specific investment decisions and timing affected the portfolio's performance.
Example of MWR: If an investor adds a substantial amount of money into the portfolio just before a significant market upturn, the MWR will likely be higher due to the positive impact of the well-timed investment.
2. Time-Weighted Return (TWR):
TWR, on the other hand, measures the compound rate of return of the portfolio, independently of the timing and size of cash flows. TWR is based solely on the investment's performance over specific periods, without consideration for any individual contributions or withdrawals made by the investor. This method is often considered more appropriate when evaluating the performance of a portfolio manager since it eliminates the influence of investor behavior.
Example of TWR: If an investor makes a large deposit during a period of market decline, TWR would calculate the portfolio's performance based on market returns, excluding the impact of the investor's cash inflow.
In summary, MWR takes into account the investor's cash flows and is influenced by the timing and size of those cash flows, while TWR solely focuses on the investment's performance and removes the impact of cash flows. The choice between MWR and TWR depends on the purpose of the performance evaluation and the perspective of the analysis (investor-level or portfolio manager-level).
