Why is there a conflict between my Absolute Return and Return in Percentage?

Why is there a conflict between my Absolute Return and Return in Percentage?

Time-Weighted Return (TWR) vs Absolute Return

Time-Weighted Return (TWR)

To calculate return as a percentage, Totality Capital Markets applies the industry-standard TWR methodology.

  • TWR is calculated as the compounded return of daily returns over the evaluation period (e.g., 1 year).
  • This approach ensures returns are measured independently of cash inflows and outflows, making it a common metric for assessing investment performance.

Absolute Return

Absolute Return measures performance by comparing the Account Value at time (t+1) vs Account Value at time (t), while adjusting for:

  • Account funding (deposits)
  • Account withdrawals

Potential Conflict Between TWR and Absolute Return

TWR does not consider portfolio size when calculating sub-period returns:

  • If sub-periods with low account value show high positive returns, while sub-periods with high account value experience slightly negative returns, the total TWR may still be positive.
  • However, the Absolute Return over the same period could be negative, leading to a discrepancy between the two metrics.

Illustrative Example

In the following case, the TWR is positive (+33%), but the Absolute Return is negative (-300) due to fluctuations in portfolio size and cash movements.

Would you like further insights or a more detailed breakdown of how TWR compares to Absolute Return in practical investment scenarios?

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