A measure of the compound rate of growth of a portfolio. It is normally used to compare the return of investment manager because the method eliminates the distorting effects of the inflows of new money. When calculating, the effect of varying cash inflows is eliminated by assuming a single investment at the beginning of a period and measuring the growth or loss of market value to the end of the period.
A rate of return calculation. The time-weighted method minimizes the impact of cash flows on rate of return calculations. Time-weighted returns are an appropriate measure of an investment manager's performance, since investment managers may not have direct control over the timing or amount of cash flows directed to them.
The amount and timing of cash flows do not impact time-weighted rates of return since the returns for each sub-period are equally weighted. Since investment managers have little control over cash flow, time-weighted returns are an appropriate method of analyzing the manager's performance.