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Article
Investor Education: How Plan Sponsors Should Report Investor’s Returns
Managerial Finance
  • Ken Johnston, Berry College
  • John Hatem, Georgia Southern University
  • Thomas A. Carnes, Berry College
Document Type
Article
Publication Date
1-1-2010
DOI
10.1108/03074351011027547
Abstract
Purpose – Most investors' retirement portfolios have inter‐period cash inflows. The standard time‐weighted mean return (or geometric mean return) is generally used to report returns on investors' retirement portfolios. The purpose of this paper is to examine the standard time‐weighted mean return and point out additional deficiencies in the time‐weighted mean in this situation, which have not been addressed in the literature. Design/methodology/approach – The paper provides examples that point out additional deficiencies that arise using geometric mean returns as estimates of an individual investor's performance. Findings – With inter‐period cash flows the dollar‐weighted return can be affected by both timing and the sequence of the asset return series even if the investor has constant inflows or outflows of capital. In contrast for these same asset return arrays, the time‐weighted mean return measure may be unaffected by these important variations in the return arrays, and thus may misrepresent actual investor results. This is an important point that has not been addressed in the literature. Originality/value – With inter‐period cash flows the dollar‐weighted return can be affected by both timing and the sequence of the asset return series even if the investor has constant inflows or outflows of capital. In contrast for these same asset return arrays, the time‐weighted mean return measure may be unaffected by these important variations in the return arrays, and thus may misrepresent actual investor results. This is an important point that has not been addressed in the literature.
Citation Information
Ken Johnston, John Hatem and Thomas A. Carnes. "Investor Education: How Plan Sponsors Should Report Investor’s Returns" Managerial Finance Vol. 36 Iss. 4 (2010) p. 354 - 363
Available at: http://works.bepress.com/john-hatem1/10/