Course: Investment Planning
Lesson 14: Evaluating Portfolio Performance

Student Question:

For both the Treynor and Sharpe, part of the calculation involves using the average portfolio return (rp). In most examples, the average portfolio return is being given. However, if I need to calculate this in real life, do I use the dollar-weighted return (internal rate of return) or the time-weighted return (geometric mean)?

Thank you.


Instructor Response:

Great question Sarah. If we’re evaluating the portfolio manager’s performance, we’d use the time-weighted return. If we’re evaluating an individual investor’s return, we’d use the dollar-weighted return. CFP Board has traditionally given the average return in risk-adjusted return questions, but if you are called upon to calculate average return, look for clues in the fact pattern to indicate which averaging convention to use.

Onward and Upward,