A Dollar Weighted Return Calculator helps investors measure the true return on an investment by considering both the timing and amount of cash flows. Unlike the time-weighted return, which isolates performance from cash flow effects, the dollar-weighted return accounts for when an investor adds or withdraws funds from an investment portfolio. This approach provides a more personalized rate of return that reflects the investor’s actual experience.
Formula of Dollar Weighted Return Calculator
The formula for calculating the dollar-weighted return (DWR) is:
0 = Initial Investment + Σ[Intermediate Cash Flows × (1+r)^(n-t)] + Final ValueWhere:
- Initial Investment: The beginning portfolio value (negative value as it represents an outgoing investment)
- Intermediate Cash Flows: Deposits (negative) or withdrawals (positive) made during the investment period
- t: The time period of each intermediate cash flow
- Final Value: The ending portfolio value
- r: The dollar-weighted return (to be solved for)
Since this equation is nonlinear, solving for r typically requires numerical methods such as the Newton-Raphson method or financial calculators.
Precomputed Dollar Weighted Returns Table
| Initial Investment | Cash Flow 1 | Time (Years) | Cash Flow 2 | Time (Years) | Final Value | Estimated Return (%) |
|---|---|---|---|---|---|---|
| $10,000 | -$2,000 | 1 | $1,500 | 2 | $12,000 | 5.3% |
| $20,000 | -$5,000 | 1.5 | $3,000 | 2.5 | $25,000 | 6.8% |
| $15,000 | -$3,000 | 2 | $2,500 | 3 | $18,500 | 4.7% |
| $50,000 | -$10,000 | 1 | $7,500 | 3 | $60,000 | 6.2% |
Example of Dollar Weighted Return Calculator
Let’s assume an investor starts with an initial investment of $10,000. They deposit $2,000 after 1 year, withdraw $1,500 after 2 years, and at the end of 3 years, their portfolio is worth $12,000.
Using the formula:
0 = -10,000 + (-2,000)(1+r)^(3-1) + (1,500)(1+r)^(3-2) + 12,000By solving for r, the approximate dollar-weighted return is 5.3%.
Most Common FAQs
The dollar-weighted return considers the impact of cash inflows and outflows, reflecting the investor’s actual experience. The time-weighted return eliminates the effect of cash flows to assess pure investment performance.
This metric is useful for individual investors who make periodic contributions or withdrawals, as it better represents the real-world impact of timing and cash flows on investment performance.
Due to the iterative nature of solving for r, using a financial calculator, Excel’s IRR function, or an online Dollar Weighted Return Calculator is recommended for accuracy.