Updated for the 2026-2027 CFA® Level I curriculum.
When money enters or leaves a portfolio, the reported return depends on whose experience you are trying to measure. Money-weighted return follows the investor’s actual capital, while time-weighted return isolates the portfolio’s performance between external cash flows.
For CFA Level I, you need to calculate both measures and explain why they may produce different results. Pay particular attention to the timing of contributions and withdrawals, since large cash flows can have a meaningful effect on the money-weighted return.
Quick Answer
Money-weighted return is the internal rate of return earned on the investor’s actual cash flows. It gives more influence to periods when more capital is invested.
Time-weighted return separates the measurement period whenever an external cash flow occurs and then compounds the resulting subperiod returns. This makes it useful for evaluating a manager who does not control client contributions and withdrawals.
Key Takeaways
Money-weighted return is calculated as an internal rate of return.
The size and timing of contributions and withdrawals affect the money-weighted result.
Time-weighted return divides the full measurement period into subperiods at each external cash flow.
Time-weighted subperiod returns are geometrically linked rather than averaged.
Money-weighted return reflects the investor’s experience with the capital actually invested.
Time-weighted return is generally more appropriate for evaluating a manager who does not control external cash flows.
The two measures can produce different results even when they use the same beginning and ending portfolio values.
What You Need to Know for CFA Level I
For CFA Level I, focus on:
Recognizing money-weighted return as an IRR calculation.
Applying a consistent cash-flow sign convention.
Identifying contributions and withdrawals as external cash flows.
Dividing the measurement period whenever an external cash flow occurs.
Calculating each time-weighted subperiod return using the correct portfolio values.
Geometrically linking subperiod returns.
Choosing the measure that fits the purpose of the performance evaluation.
Explaining how a large cash flow before a strong or weak period affects the money-weighted result.
What Counts as an External Cash Flow?
An external cash flow moves money between the investor and the portfolio. Contributions add investor capital, while withdrawals remove capital.
Investment gains, losses, dividends, and interest earned within the portfolio are part of portfolio performance. They are generally not treated as external cash flows unless the amount is paid out of the portfolio to the investor.
Keeping these two sources of change separate helps you choose the correct values when calculating subperiod returns.
Money-Weighted vs Time-Weighted Returns: What Is the Main Difference?
Money-weighted return incorporates the size and timing of the investor’s cash flows. Time-weighted return measures how the investments performed during each subperiod, without allowing the timing of external cash flows to dominate the result.
Area | Money-Weighted Return | Time-Weighted Return |
|---|---|---|
Core method | Internal rate of return | Geometrically linked subperiod returns |
Treatment of cash flows | Includes the size and timing of external cash flows | Separates the period whenever an external cash flow occurs |
Best reflects | The investor’s actual return experience | The portfolio manager’s investment performance |
Main sensitivity | How much capital was invested during strong and weak periods | Investment performance within each subperiod |
Typical use | Investor-controlled cash flows, private investments, or capital projects | Manager evaluation when clients control contributions and withdrawals |
Main calculation challenge | May require an IRR function or financial calculator | Requires portfolio values immediately before or after each external cash flow |
Both measures can be valid. The appropriate choice depends on whether the analysis is focused on the investor’s capital or the manager’s investment decisions.
How Do You Calculate Money-Weighted Return?
Money-weighted return, or MWRR, is the discount rate that sets the present value of all investor cash flows equal to zero. It is the portfolio equivalent of an internal rate of return.
Using the investor’s perspective:
A contribution is money paid into the investment, so it receives a negative sign.
A withdrawal is money received from the investment, so it receives a positive sign.
The ending portfolio value is treated as a final positive cash flow.
Where:
Inline equation code = cash flow at time
Inline equation code = money-weighted return per period
Inline equation code = timing of each cash flow, expressed in periods
Inline equation code = final measurement period
The rate represented by inline equation code is the money-weighted return that makes the discounted cash inflows and outflows balance.
When the timing values are expressed in years, the resulting rate is an annual return. A cash flow occurring six months after the beginning of the period would therefore use an exponent of inline equation code .
How Cash-Flow Timing Affects MWRR
Money-weighted return gives more influence to periods when more investor capital is in the portfolio.
A large contribution before a strong period tends to raise the money-weighted return. A large contribution before a weak period tends to lower it. The result follows the investor’s actual experience because more money was exposed to the later performance.
How Do You Calculate Time-Weighted Return?
Time-weighted return, or TWRR, separates the full measurement period whenever an external cash flow occurs. Each subperiod return measures performance before the next contribution or withdrawal changes the portfolio balance.
The subperiod returns are then geometrically linked.
Where:
Inline equation code = time-weighted rate of return
Inline equation code = investment return for subperiod
Inline equation code = subperiod number
Inline equation code = total number of subperiods
For two subperiods, the formula becomes:
Where:
Inline equation code = return earned during the first subperiod
Inline equation code = return earned during the second subperiod
Geometric linking preserves the compounding relationship between periods. A simple arithmetic average would describe the average subperiod return, but it would not calculate the portfolio’s compounded return across the full measurement period.
How to Handle an External Cash Flow
Suppose a contribution occurs halfway through the year. The portfolio value immediately before the contribution closes the first subperiod. The value immediately after the contribution becomes the starting value for the second subperiod.
This approach prevents the contribution itself from being counted as investment performance.
Worked Example: Money-Weighted vs Time-Weighted Return
A portfolio has the following values during one year:
Beginning portfolio value: $100
Value after six months, immediately before a contribution: $110
Contribution after six months: $50
Value immediately after the contribution: $160
Ending portfolio value: $168
The portfolio performed well during the first six months and earned a smaller return during the second half of the year. Because the investor added money before the weaker period, the money-weighted return will place more emphasis on that second-half performance.
Step 1: Calculate the First Subperiod Return
The first subperiod runs from the beginning of the year until immediately before the $50 contribution.
The portfolio earned 10.0% before the investor added more capital.
Step 2: Calculate the Second Subperiod Return
The contribution increases the portfolio value from $110 to $160. The second subperiod begins with the post-contribution value of $160.
The portfolio earned 5.0% during the second half of the year.
Step 3: Link the Subperiod Returns
The time-weighted return compounds the two subperiod results.
The portfolio’s time-weighted return is 15.5%.
Step 4: Set Up the Money-Weighted Return
From the investor’s perspective, the cash flows are:
A $100 outflow at the beginning of the year.
A $50 outflow after six months.
A $168 inflow at the end of the year.
The money-weighted return solves the following equation:
Where:
Inline equation code = annual money-weighted return
Inline equation code = the six-month timing of the contribution, expressed as half a year
Solving for inline equation code gives:
The money-weighted return is approximately 14.5%.
Interpreting the Results
The time-weighted return is 15.5%, while the money-weighted return is approximately 14.5%.
More investor capital was in the portfolio during the weaker 5.0% subperiod. The money-weighted calculation gives that period more influence, which lowers the investor’s return relative to the time-weighted result.
The time-weighted calculation treats the 10.0% and 5.0% subperiod returns according to their compounded investment performance. The investor’s decision to add $50 does not change the manager’s measured result.
When Should You Use Time-Weighted Return?
Time-weighted return is generally used to evaluate an investment manager who does not control the timing or size of client contributions and withdrawals.
For example, a portfolio manager may make sound investment decisions even if a client contributes a large amount immediately before the market declines. Time-weighted return separates the external contribution from the investment performance, giving a clearer view of what the manager controlled.
This measure also makes it easier to compare managers whose clients have different deposit and withdrawal patterns.
When Should You Use Money-Weighted Return?
Money-weighted return is useful when you want to measure the return earned on the investor’s actual capital.
It is particularly relevant when the investor or decision-maker controls the timing and size of cash flows. Examples may include private equity investments, real estate projects, capital budgeting decisions, or personal portfolios where the investor actively chooses when to add or withdraw money.
Because the calculation follows the actual cash flows, it answers a practical question: how well did the investor’s money perform?
How Do You Choose Between MWRR and TWRR?
Start by identifying what the question is asking you to evaluate.
Use time-weighted return when:
The focus is the investment manager’s performance.
The manager does not control external cash flows.
You need to compare managers or investment strategies fairly.
Portfolio values are available around each external cash flow.
Use money-weighted return when:
The focus is the investor’s actual experience.
The investor or manager controls the cash-flow decisions.
The amount of capital invested at different times should affect the result.
The question provides a series of investor cash flows and asks for an IRR.
A question mentioning manager evaluation usually points toward time-weighted return. A question focused on the return earned by the investor’s actual dollars usually points toward money-weighted return.
Common Exam Traps
Common mistakes include:
Treating an investor contribution as investment performance.
Using the portfolio value after a contribution as the ending value of the preceding subperiod.
Using the value before a contribution as the starting value of the following subperiod.
Averaging subperiod returns instead of geometrically linking them.
Applying the wrong sign to a contribution or withdrawal in the IRR equation.
Forgetting to include the ending portfolio value as a positive cash flow.
Assuming money-weighted and time-weighted returns must match because they use the same beginning and ending values.
Assuming money-weighted return always produces the lower result.
Selecting time-weighted return for investor experience when the timing of the investor’s capital is central to the question.
Selecting money-weighted return for manager evaluation when the manager had no control over external cash flows.
Practice Question
A portfolio earns 12% before a large client contribution and 4% after the contribution. The investment manager did not control the timing or amount of the contribution.
Which return measure is most appropriate for evaluating the manager’s performance?
Money-weighted return, because it reflects the amount invested during each period
Time-weighted return, because it separates the effect of the external contribution
Money-weighted return, because it always produces the more conservative result
Correct Answer: B
Time-weighted return divides the measurement period when the contribution occurs and links the return earned in each subperiod. This prevents the client’s decision to add capital from changing the manager’s measured performance.
Option A describes why money-weighted return is useful for evaluating the investor’s experience. It is less suitable here because the manager did not control the contribution.
Option C is incorrect because money-weighted return may be higher or lower than time-weighted return. The result depends on whether larger amounts were invested during stronger or weaker performance periods.
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FAQs About Money-Weighted and Time-Weighted Returns
Is Money-Weighted Return the Same as IRR?
Yes. Money-weighted return is the internal rate of return calculated from the investor’s contributions, withdrawals, and ending portfolio value.
The cash-flow signs must follow a consistent perspective. Under the investor perspective, contributions are negative cash flows, while withdrawals and the ending value are positive cash flows.
Why Can Money-Weighted and Time-Weighted Returns Be Different?
The two measures assign influence differently when external cash flows occur.
Money-weighted return gives greater influence to periods when more capital is invested. Time-weighted return compounds each subperiod’s investment performance without allowing the size of an external contribution or withdrawal to dominate the result.
Can Money-Weighted and Time-Weighted Returns Be Equal?
Yes. They may be equal when no external cash flows occur during the measurement period.
They can also be close when cash flows are small or when investment performance is similar across the subperiods surrounding those cash flows.
Which Return Measure Is Better for Evaluating a Portfolio Manager?
Time-weighted return is generally preferred when the manager does not control client contributions and withdrawals. It isolates the performance generated through the manager’s investment decisions.
Money-weighted return may be appropriate when the manager controls the timing and amount of the cash flows.
Do You Average Subperiod Returns to Calculate TWRR?
No. Time-weighted subperiod returns are geometrically linked.
For two subperiods, use:
Where:
Inline equation code = return during the first subperiod
Inline equation code = return during the second subperiod