CFA Practice Question

CFA Practice Question

Over a year, a mutual fund has quarterly returns of 4%, 2.5%, 2%, and 0.5%. Investor A purchases more of the mutual fund every quarter. Investor B sells some of the mutual fund every quarter. Which measure of return will be higher?
A. Investor A Money-Weighted, and Investor B Money-Weighted
B. Investor A Time-Weighted, and Investor B Money-Weighted
C. Investor A Money-Weighted, and Investor B Time-Weighted
Explanation: The rate of return falls every quarter. As investor A has more money invested every quarter, she has a greater fraction invested towards the later quarters when returns are lower. So her money-weighted returns (IRR) will be lower. Time-weighted returns are not affected by changing investments, as each quarter is given the same 'weight' irrespective of the amount invested. For investor B it is vice-versa.

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