In measuring the comparative performance of different fund managers,the preferred method of calculating rate of return is _________.

Question

Quizplus · Accepted Answer

When comparing the performance of different fund managers, it is important to use a rate of return calculation that removes the impact of any external factors that may affect returns. The time-weighted rate of return is the most preferred method as it eliminates any influence from external factors such as cash flows into and out of the fund. This method measures the compounded growth rate of a portfolio between periods and is considered a more accurate measure of performance. The other options, such as arithmetic average and dollar-weighted, may not be as reliable as they can be influenced by external factors. Internal rate of return may also not reflect the true performance of the manager as it assumes that cash flows are reinvested at the same rate. Therefore, the best choice for measuring comparative performance of different fund managers is the time-weighted rate of return.

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