The portfolio performance calculation that investors prefer to see is the

The portfolio performance calculation that investors prefer to see is the

• A. arithmetic return
• B. time-weighted return
• C. Jensen's alpha
• D. dollar-weighted return

Answer: (D)

Investors prefer the dollar-weighted return because it captures the actual money the investor earned given their own cash flows. This measure, the internal rate of return, accounts for when and how much money was added or withdrawn, so the result reflects the investor’s real experience with the portfolio. It answers what the investor’s money actually earned, considering timing of investments and withdrawals, which is exactly what a personal return would look like. In contrast, time-weighted return isolates the manager’s performance by removing the impact of cash flows, which is great for comparing managers but doesn’t show the investor’s true experience with their own funds. Arithmetic return is a simple average that ignores compounding and cash-flow timing, and Jensen’s alpha is a risk-adjusted performance metric vs a benchmark, not a direct measure of realized return given cash flows.

Investors prefer the dollar-weighted return because it captures the actual money the investor earned given their own cash flows. This measure, the internal rate of return, accounts for when and how much money was added or withdrawn, so the result reflects the investor’s real experience with the portfolio. It answers what the investor’s money actually earned, considering timing of investments and withdrawals, which is exactly what a personal return would look like.

In contrast, time-weighted return isolates the manager’s performance by removing the impact of cash flows, which is great for comparing managers but doesn’t show the investor’s true experience with their own funds. Arithmetic return is a simple average that ignores compounding and cash-flow timing, and Jensen’s alpha is a risk-adjusted performance metric vs a benchmark, not a direct measure of realized return given cash flows.