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Axiomatic Characterization of the Time-Weighted Rate of Return

Author

Listed:
  • Kenneth B. Gray, Jr.

    (Bank Administration Institute, Park Ridge, Illinois)

  • Robert B. K. Dewar

    (Illinois Institute of Technology)

Abstract

In a recently published banking industry study [Fisher, Lawrence. 1968. Measuring rates of return. Chapter 2 in James H. Lorie et al., Measuring the Investment Performance of Pension Funds for the Purpose of Inter-Fund Comparison, Bank Administration Institute, Park Ridge, Illinois.], it was pointed out that the venerable internal rate of return is inappropriate for measuring the performance of pension fund managers. It is suggested that a measure of management performance should depend solely on the way in which the manager proportions the fund's resources and not on fund contributions and withdrawals. Unfortunately, the internal rate depends on this contribution and withdrawal pattern. The banking industry study proposed a new measure, the time-weighted rate of return, which is not dependent on the contribution and withdrawal pattern. The study, however, was incomplete in that it did not state or show that the time-weighted rate is the only well-behaved rate of return that is not influenced by contributions or withdrawals. The latter result is developed in this paper.

Suggested Citation

  • Kenneth B. Gray, Jr. & Robert B. K. Dewar, 1971. "Axiomatic Characterization of the Time-Weighted Rate of Return," Management Science, INFORMS, vol. 18(2), pages 32-35, October.
    • Handle: RePEc:inm:ormnsc:v:18:y:1971:i:2:p:b32-b35
    DOI: 10.1287/mnsc.18.2.B32
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    Citations

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    Cited by:

    1. Aleksandr Alekseev & Mikhail Sokolov, 2011. "A Note on Indices of Return," EUSP Department of Economics Working Paper Series 2011/02, European University at St. Petersburg, Department of Economics, revised 21 Feb 2011.
    2. Magni, Carlo Alberto & Veronese, Piero & Graziani, Rebecca, 2017. "Chisini means and rational decision making: Equivalence of investment criteria," MPRA Paper 81532, University Library of Munich, Germany.
    3. Alexander Alekseev & Mikhail Sokolov, 2016. "Portfolio Return Relative to a Benchmark," EUSP Department of Economics Working Paper Series Ec-04/16, European University at St. Petersburg, Department of Economics.
    4. Magni, Carlo Alberto, 2013. "Generalized Makeham’s formula and economic profitability," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 747-756.
    5. Magni, Carlo Alberto, 2014. "Arithmetic returns for investment performance measurement," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 291-300.
    6. Aleksandr Alekseev & Mikhail Sokolov, 2016. "Portfolio Return Relative to a Benchmark," EUSP Department of Economics Working Paper Series 2016/04, European University at St. Petersburg, Department of Economics.
    7. Carlo Alberto Magni & Andrea Marchioni, 2022. "Performance attribution, time-weighted rate of return, and clean finite change sensitivity index," Journal of Asset Management, Palgrave Macmillan, vol. 23(1), pages 62-72, February.
    8. Alexander Alexeev & Mikhail Sokolov, 2011. "A Note on Indices of Return," EUSP Department of Economics Working Paper Series Ec-02/11, European University at St. Petersburg, Department of Economics, revised 21 Feb 2011.
    9. Guzzetti, Marco, 2020. "Approximating the time-weighted return: The case of flows at unknown time," Insurance: Mathematics and Economics, Elsevier, vol. 90(C), pages 25-34.

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