In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is
A)internal rate of return.
B)arithmetic average.
C)dollar weighted.
D)time weighted.
E)None of the options

Question

Quizplus · Accepted Answer

For the investor, the internal rate of return (or dollar-weighted rate of return) is the preferred measure because if the investor chooses to invest heavily in one investment vehicle that performs extremely well, an increased return results, which is reflected in A (or C).However, the mutual fund manager does not usually make the decision as to the amount to invest in a particular vehicle; therefore, the time-weighted rate of return is usually used to evaluate these managers.Arithmetic average is a good measure for estimating future returns (if expectations are unchanged).

In Measuring the Comparative Performance of Different Fund Managers, the Preferred