What is assumed in a time weighted return calculation?

In a time-weighted return calculation, it is assumed that the amount invested was a fixed dollar amount. This method is designed to measure the performance of an investment portfolio over time, independent of any cash flows that may occur during that period. By focusing on the proportionate changes in value, it neutralizes the impact of how much cash was added or withdrawn, allowing for a clearer picture of the portfolio's performance.

The time-weighted return approach effectively averages the returns over different time periods to reflect the performance of the investment strategy itself, rather than the influence of external cash flows. This is particularly useful in assessing the effectiveness of a fund manager’s performance when there are significant inflows or outflows, as it emphasizes the actual growth of the investment portfolio over time without being skewed by the timing and size of additional investments or withdrawals.