In Performance Measurement: Setting the Standards, Interpreting the Numbers, John Sherrerd, a member of the Performance Presentation Standards Committee of the AIMR, stated: It is important to keep in mind that the objective of these performance statistics is to measure the capabilities of the manager, not the cash flows. It is not an attempt to measure how many dollars the client has earned over a period of time. If the performance of the manager is being mea- sured, those results should not be influenced by whether the client is tak- ing money out and spending it, the way most endowments might, or leav- ing it in, as many corporations do.

a. Why is the dollar-weighted rate of return affected by contributions and with- drawals by the client?

b. What rate-of-return methodology does the AIMR standards require?

AppendixLO1