Time-Weighted Rate of Return (TWRR) measures the compound rate of growth of a portfolio by eliminating the impact of external cash flows (deposits and withdrawals).
It is calculated by breaking the portfolio’s performance into sub-periods separated by cash flows, computing the return in each sub-period, and then compounding these returns.
\( \displaystyle
\text{TWRR} = \prod_{t=1}^{T} (1 + r_t) – 1
\)
where:
- \( r_t = \) return of the portfolio during sub-period \( t \) (between two cash flows)
- \( T = \) total number of sub-periods considered
This method neutralizes the effect of investor decisions about timing of cash inflows and outflows, giving a clearer picture of the manager’s performance.