Tom decides to begin investing some portion of his annual bonus, beginning this year with $5,000. In the first year he earns a 10% return and adds $3,500 to his investment. In the second his portfolio loses 5% but, sticking to his plan, he adds $500 to his portfolio. In this year his portfolio returns 2%. What is Tom's dollar-weighted average return on his investments?
A) 0.34 percent
B) 1.02 percent
C) 1.54 percent
D) 2.23 percent
E) 2.58 percent

Question

Quizplus · Accepted Answer

The dollar-weighted average return considers the timing and amount of cash flows. Calculating it involves finding the internal rate of return (IRR) for the cash flows: -$5,000 (initial investment), -$3,500 (end of year 1), -$500 (end of year 2), and the final portfolio value at the end of year 3. Solving for IRR gives approximately 1.02%.

Tom Decides to Begin Investing Some Portion of His Annual