Assume a client provides a portfolio manager with $500,000, which is invested at the beginning of the year. At year end, the account is worth $545,000. At the beginning of year two, the client provides the manager with an additional $55,000. At the end of year two, the value of the portfolio is $630,000. How well did the manager perform; that is, what is the time‐weighted return?

During year one, the portfolio rate of return is ($545,000 $500,000) / $500,000, or 9 percent. During year two, the portfolio return is ($630,000 $600,000) / $600,000, or 5 percent. The TWR for the two-year period = [(1.09)(1.05)] - 1.0 =14.45 percent. Annualized, TWR = [(1.09)(1.05)]^1/2 - 1 = (1.1445)^1/2 -1 = 1.0698 - 1.0 = 6.98 percent. 

How well did the client perform; that is, what is the money‐weighted return? 

Using a financial calculator, the entries would be as follows:

CF₀ = -500,000; CF₁ = -55,000; CF₂ = 630,000; Compute IRR 6.88 percent.