Hello,
I have doubts related to all parts of question #1 in this sitting. Elaborating further below-
Note that I have solved quite a few questions related to TWRR and MWRR but this one caught me off guard in spite of hardly 4 marks being awarded for calculation.
Listing partwise questions below.
i) a)There are annual contributions to the pension each year although the impact of these allocations on unit price is not transparent. With the given information, I thought we would calculate TWRR for Fund A by solving the equation (1+i)^(3) =((90-8)/100)*((114-5)/90)*((133-2)/114) i.e i= 4.5%
However, the examiner's report is simply calculating it as (latest unit price/starting unit price)^(1/3)-1= (133/100)^(1/3)-1=9.97%
Why is my approach wrong and why is it as simple as (133/100)^(1/3)-1?
i)
b) The solution has following statements
No account has been made of cashflows - Is it because we calculated TWRR above and not MWRR?
Investment made in the middle of the period could have done better in Fund A - How?
ii) The solution is very confusing. If we assume that cashflow occurs at the end of the year, are we simultaneously assuming that unit price remains constant throughout the year (31 Dec 2015 - 30 Dec 2016) ? Is a 'year' in this question starting from 31 Dec 2015 unlike conventional financial year beginning from 1st Jan 2015?
I was thinking of the equation below for fund A, assuming that cashflows occur right after unit price is determined hence accumulated for the same period as unit price. Same assumption as cashflow occurring at the start of the period (31 Dec 2015 here)
133=100*(1+i)^(3)+8*(1+i)^(3)+5*(1+i)^(2)+2*(1+i)
Got a different solution because LHS= 153.36 in the solution. How is it 153.36?
Similarly, for fund B, LHS= 151.829 looks odd instead of 270! Please help.
iii) The solution has following statements which I didn't understand at all. How can we arrive at this conclusion?
Investment in fund A was weighted towards the beginning of the three-year period, those for fund B was weighted towards the end of the period.
Fund A's return was best towards the end of the period, whereas fund B's returns were best towards the start.
Please advise if I am being fundamentally wrong here. Will revise these topics accordingly.
Thank you in advance!
I have doubts related to all parts of question #1 in this sitting. Elaborating further below-
Note that I have solved quite a few questions related to TWRR and MWRR but this one caught me off guard in spite of hardly 4 marks being awarded for calculation.
Listing partwise questions below.
i) a)There are annual contributions to the pension each year although the impact of these allocations on unit price is not transparent. With the given information, I thought we would calculate TWRR for Fund A by solving the equation (1+i)^(3) =((90-8)/100)*((114-5)/90)*((133-2)/114) i.e i= 4.5%
However, the examiner's report is simply calculating it as (latest unit price/starting unit price)^(1/3)-1= (133/100)^(1/3)-1=9.97%
Why is my approach wrong and why is it as simple as (133/100)^(1/3)-1?
i)
b) The solution has following statements
No account has been made of cashflows - Is it because we calculated TWRR above and not MWRR?
Investment made in the middle of the period could have done better in Fund A - How?
ii) The solution is very confusing. If we assume that cashflow occurs at the end of the year, are we simultaneously assuming that unit price remains constant throughout the year (31 Dec 2015 - 30 Dec 2016) ? Is a 'year' in this question starting from 31 Dec 2015 unlike conventional financial year beginning from 1st Jan 2015?
I was thinking of the equation below for fund A, assuming that cashflows occur right after unit price is determined hence accumulated for the same period as unit price. Same assumption as cashflow occurring at the start of the period (31 Dec 2015 here)
133=100*(1+i)^(3)+8*(1+i)^(3)+5*(1+i)^(2)+2*(1+i)
Got a different solution because LHS= 153.36 in the solution. How is it 153.36?
Similarly, for fund B, LHS= 151.829 looks odd instead of 270! Please help.
iii) The solution has following statements which I didn't understand at all. How can we arrive at this conclusion?
Investment in fund A was weighted towards the beginning of the three-year period, those for fund B was weighted towards the end of the period.
Fund A's return was best towards the end of the period, whereas fund B's returns were best towards the start.
Please advise if I am being fundamentally wrong here. Will revise these topics accordingly.
Thank you in advance!