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TWR and IRR Calculations

 
Benchmarks
Last Post by Lowell Herr 5 years ago
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 Lowell Herr
(@lowell)
Noble Member Admin Registered
Joined: 13 years ago
Posts: 782
Topic starter May 25, 2021 2:51 AM  

Here is the link to one of the best articles I've ever read that explains the difference between Time-Weighted Return (TWR) and the Internal Rate of Return (IRR) - frequently called dollar weighted return.

The portfolio software I use (Investment Account Manager) uses TWR to calculate benchmark returns while individual portfolio returns are calculated using IRR.  Depending on cash flowing in and out of a portfolio, results are skewed as you see if you read the example near the end of the above article.

Here is my thinking.  While this comparison would not meet GIPS standards, I'm leaning more and more toward using the IRR and Jensen's Alpha values from the passively managed Schrodinger as the standard.  In other words, how do the Dual Momentum and Relative Strength portfolios compare with the Schrodinger?  If the actively managed portfolios are unable to surpass the passively managed Robo Advisor portfolio, why go to the added effort?

The one reason for the effort is to protect capital, one thing the Schrodinger does not do.

Lowell



   
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