TWRR, two different formulae

[VSA_88]

Please can someone help me understand why there are two different versions of the TWRR being used? In the core reading I can see the cashflows are added in the denominators whereas in the tutorials and April 19 paper, Q7, the cashflows are subtracted from the numerators. I presume I am missing something in terms of the timing of payments, but I can't see anything regarding the latter formula in the core reading.

 

[David Wilmot]

Hi VSA_88

The assumption underlying the Core Reading formula is that cashflows occur at the start of each period. The assumption stated in Q7 of the April 2019 paper is that cashflows occur at the end of each period. It is this difference in assumptions that leads to the observation you have made, as:

• under the former assumption, the cashflows need to be accounted for in the denominators (each of which is the value being invested at the start of the period related to that ratio in the calculation), and
• under the latter assumption, the cashflows need to be accounted for in the numerators (each of which is the accumulated value at the end of the prior related to that ratio in the calculation).

OK?

David

 

[VSA_88]

Hi David
Many thanks for the response. That is clear, my gut feeling it was something to do with timing of cashflows.