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 above

Question

Quizplus · Accepted Answer

The preferred method of calculating rate of return for comparing the performance of different fund managers is time-weighted rate of return. This is because the time-weighted rate of return removes the distortion of cash inflows and outflows and only measures the pure return generated by the fund manager's investment decisions. Other methods such as arithmetic average and dollar-weighted rate of return can be skewed by the timing and magnitude of cash flows. Internal rate of return can also be used but it assumes that all cash flows are reinvested at the internal rate of return, which may not be realistic.

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