Money-Weighted Rate of Return Calculator

The money-weighted rate of return (MWROR) is a financial metric that calculates the average rate of return on an investment portfolio, weighted by the amount of money invested at each period. This method provides a more accurate representation of an investment's performance than simple arithmetic averages, especially for investments that change in size over time.

What is Money-Weighted Rate of Return?

The money-weighted rate of return is a compounding measure that accounts for the changing size of an investment over time. Unlike time-weighted returns, which assume a constant investment amount, money-weighted returns consider the actual investment amounts at each period.

This method is particularly useful for:

Investments that grow or shrink in value (like stocks or mutual funds)
Portfolios with reinvested dividends or contributions
Comparing different investment periods

Key Difference

Money-weighted returns are different from time-weighted returns. While time-weighted returns assume a constant investment amount, money-weighted returns use the actual investment amounts at each period.

How to Calculate Money-Weighted Rate of Return

Calculating the money-weighted rate of return involves several steps:

Determine the investment amounts at each period
Calculate the total investment at the beginning of each period
Sum the products of investment amounts and their respective periods
Calculate the total investment at the end of the period
Apply the formula to find the money-weighted rate of return

For more complex calculations, using a financial calculator or spreadsheet software can simplify the process.

Formula

Money-Weighted Rate of Return Formula

MWROR = [(Ending Value - Beginning Value) / Sum of (Investment Amount × Period)] × Number of Periods

The formula accounts for the changing investment amounts over time, providing a more accurate representation of investment performance.

Example Calculation

Consider an investment that grows as follows:

Initial investment: $10,000
After 1 year: $12,000
After 2 years: $15,000
After 3 years: $18,000

Using the money-weighted rate of return formula, we can calculate the average annual return over this period.

Interpreting Results

The money-weighted rate of return provides several insights:

It shows the average annual return considering the changing investment size
It helps compare different investment periods
It accounts for compounding effects over time

However, it's important to note that this metric doesn't account for inflation or taxes, which may affect the actual investment performance.

FAQ

What is the difference between money-weighted and time-weighted returns?

Money-weighted returns consider the actual investment amounts at each period, while time-weighted returns assume a constant investment amount. Money-weighted returns are more accurate for investments that change in size over time.

When should I use money-weighted rate of return?

Use money-weighted rate of return when you want to account for changes in investment size over time, such as with stocks, mutual funds, or portfolios with reinvested dividends.

How does money-weighted rate of return differ from internal rate of return?

Money-weighted rate of return is an average measure, while internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows equal to the initial investment. IRR is more complex to calculate but provides a single rate that equates the investment's performance.