Return measurement
Time-Weighted Return (TWR)
Compounded performance with external cash-flow effects removed.
What Time-Weighted Return Means
TWR divides a period at each external cash flow, calculates every subperiod return, then geometrically links them.
Time-Weighted Return Formula
TWR = [(1 + r₁)(1 + r₂)…(1 + rₙ)] − 1
How to Read the Result
Subperiod returns of 5%, −2%, and 3% link to approximately 5.99%.
Limitations
- It needs accurate valuations at cash-flow boundaries.
- It can differ from the investor's dollar experience.
- It does not describe drawdown or liquidity.
Common Questions
Why does TWR differ from account growth?
Account growth includes deposits and withdrawals; TWR removes their mechanical effect.