Question

A husband and wife are planning for retirement and they believe that a comparison over a five- year period would be appropriate. They are given the following information about one mutual fund that they are considering. Assume that all remaining assets under management are withdrawn by the family at the end of 5 years.

    

Year Beginning Assets Under Management

1. 30.000.000

2. 35.000.000

3. 25.000.000

4. 15.000.000

5. 20.000.000

Net Return (%)

16%

12%

-17%

-3%

6%

a. Compute the arithmetic and geometric mean annual return for the fund.

b. What is the money-weighted annual return for the fund? You can calculate the annual cash flow (either additional investment or withdrawal by the couple) at year t as the difference between the beginning assets under management at year t and ending assets under management at year t-1.

Answer 1

b) To calculate MWAR at first we have to build the table below in excel and assign any value let say 3% to MWAR. Our goal here is to make Discounted Cash Flow total to be zero. To do this we will use excel goal seek function. The setup of goal seek function is shown at last. Goal seek function calculates MWAR as 4.7856%

Thus at MWAR of 4.7856% the sum of Discounted CF is 0.