when calculating the time weighted rate of return it is assumed that all cash distributions are reinvested in the portfolio daily portfolio valuations are needed whenever there is external cash flow such as a deposit or a withdrawal which would denote the start of a new sub period in addition sub periods must be the same to compare the returns of different portfolios or investments these periods are then geometrically linked to determine the time weighted rate of return 
because investment managers that deal in publicly traded securities do not typically have control over fund investors cash flows the time weighted rate of return is a popular performance measure for these types of funds as opposed to the internal rate of return irr which is more sensitive to cash flow movements examples of using the twras noted the time weighted return eliminates the effects of portfolio cash flows on returns to see this how it works consider the following two investor scenarios investor 1 invests 1 million into mutual fund a on december 31 on august 15 of the following year their portfolio is valued at 1 162 484 at that point august 15 they add 100 000 to mutual fund a bringing the total value to 1 262 484 by the end of the year the portfolio has decreased in value to 1 192 328 the holding period return for the first period from december 31 to august 15 would be calculated as the holding period return for the second period from august 15 to december 31 would be calculated as the second sub period is created following the 100 000 deposit so that the rate of return is calculated reflecting that deposit with its new starting balance of 1 262 484 or 1 162 484 100 000 the time weighted return for the two time periods is calculated by multiplying each subperiod s rate of return by each other the first period is the period leading up to the deposit and the second period is after the 100 000 deposit investor 2 invests 1 million into mutual fund a on december 31 on august 15 of the following year their portfolio is valued at 1 162 484 at that point august 15 they withdraw 100 000 from mutual fund a bringing the total value down to 1 062 484 by the end of the year the portfolio has decreased in value to 1 003 440 the holding period return for the first period from december 31 to august 15 would be calculated as the holding period return for the second period from august 15 to december 31 would be calculated as the time weighted return over the two time periods is calculated by multiplying or geometrically linking these two returns as expected both investors received the same 9 79 time weighted return even though one added money and the other withdrew money eliminating the cash flow effects is precisely why time weighted return is an important concept that allows investors to compare the investment returns of their portfolios and any financial product difference between twr and rora rate of return ror is the net gain or loss on an investment over a specified time period expressed as a percentage of the investment s initial cost 1 gains on investments are defined as income received plus any capital gains realized on the sale of the investment however the rate of return calculation does not account for the cash flow differences in the portfolio whereas the twr accounts for all deposits and withdrawals in determining the rate of return limitations of the twrdue to changing cash flows in and out of funds on a daily basis the twr can be an extremely cumbersome way to calculate and keep track of the cash flows it s best to use an online calculator or computational software another often used rate of return calculation is the money weighted rate of return 