Dollar weighted return
- Thread starter Rosher
- Start date
Hi Ruchir,
It should be explained better: the dollar weighted return (DWR) is the internal rate of return (IRR), which does not have an analytical solution (although when there are only three cash flows, as here, we can try to factor the implied quadratic equation), so we need the calculator's help. For what it's worth, this is the first year the FRM has assigned dollar weighted return, so there is not an FRM testing history of the IRR, which requires additional calculator proficiency beyond the previous expectations, so I am frankly not expected proficiency on the below, in 2012:
We are solving for the (r) that makes it true that:
if we invest initial cash flow of $100 (T0)
plus another 95 (T1, end of year 1),
we receive 220 at T2.
i.e.,
-100000 -95000/(1+r) + 220000/(1+r)^2 = 0, or same thing:
+100000 +95000/(1+r) - 220000/(1+r)^2 = 0;
either way, what discount rate (r) solves for the sum of present values of cash inflows + outflows = 0
With the TI BA II+, the steps are:
[CF] [2nd] [CLR Work] ie, clear cashflow worksheet
100[enter]
[↓] 95 [enter]
[↓][↓] 220 [+/-][enter]
[IRR][CPT] --> should return 8.24418%
I hope that explains, thanks,
It should be explained better: the dollar weighted return (DWR) is the internal rate of return (IRR), which does not have an analytical solution (although when there are only three cash flows, as here, we can try to factor the implied quadratic equation), so we need the calculator's help. For what it's worth, this is the first year the FRM has assigned dollar weighted return, so there is not an FRM testing history of the IRR, which requires additional calculator proficiency beyond the previous expectations, so I am frankly not expected proficiency on the below, in 2012:
We are solving for the (r) that makes it true that:
if we invest initial cash flow of $100 (T0)
plus another 95 (T1, end of year 1),
we receive 220 at T2.
i.e.,
-100000 -95000/(1+r) + 220000/(1+r)^2 = 0, or same thing:
+100000 +95000/(1+r) - 220000/(1+r)^2 = 0;
either way, what discount rate (r) solves for the sum of present values of cash inflows + outflows = 0
With the TI BA II+, the steps are:
[CF] [2nd] [CLR Work] ie, clear cashflow worksheet
100[enter]
[↓] 95 [enter]
[↓][↓] 220 [+/-][enter]
[IRR][CPT] --> should return 8.24418%
I hope that explains, thanks,
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