The balance of Mr. Richie's account in Gables Capital, a hedge fund, is now $1,540,000. The history of his investment with the fund is as follows. Three years ago, Mr. Richie opened the account and invested $1,000,000. Then, one year after the initial investment, Mr. Richie invested an additional $300,000. At that time, the value of his investment at the fund (right before the additional investment) was $1,100,000. There were no other cash inflows or outflows.

 a) What is Mr. Richie's annualized time‐weighted return? 

 b) Write down the Equation that would solve for the annualized dollar‐weighted return. What is the solution to the equation? 

 c) Assume that Gables Capital does not change its investment strategy as a result of one single individual client's cash flows. Moreover, assume that, instead of adding $300,000 two years ago, Mr. Richie actually withdrew $200,000. Of course, in this case there would be a new balance today (not equal to $1,540,000).   

 c.1) What is Mr. Richie's annualized time‐weighted return now? 

 c.2) What is Mr. Richie's annualized dollar‐weighted return now? 

 c.3) Explain the differences between the time‐weighted and dollar‐weighted return in a) and b) versus in c.1 and c.2

Answer rating: 100% (QA)

Lets break down the questions step by step a To calculate Mr Richies annualized timeweighted return we need to find the geometric mean of the yearly r... View the full answer