A client contributes a large amount to a managed portfolio shortly before a period of...

The time-weighted rate of return is generally more appropriate for evaluating the Portfolio Manager because it removes the distorting effect of external cash flows that the manager does not control. The measurement period is divided at each contribution or withdrawal, the return for each subperiod is calculated, and the subperiod returns are geometrically linked. Option B is correct.

A money-weighted rate of return incorporates the amount and timing of the client’s cash flows. It reflects the client’s actual investment experience and is therefore useful for client reporting, but it can make a manager appear better or worse depending on when the client added or withdrew money. In this scenario, the large contribution just before strong performance would materially influence the money-weighted result.

Current yield applies to income-producing securities such as bonds, while the dividend payout ratio measures the proportion of earnings distributed as dividends. Neither is a portfolio-performance methodology.

The selected return measure must match the purpose of the analysis. Time-weighted return is suitable for comparing investment-management performance against a benchmark or peer group. Money-weighted return is suitable for evaluating the investor’s personal outcome.

The CIRO syllabus expressly includes holding-period, time-weighted and money-weighted returns, benchmark comparisons and risk-adjusted performance measurement.

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