What is the time weighted rate of return calculated by?

The time-weighted rate of return is calculated by considering how the investment performs over time, specifically by isolating the impact of cash flows. This method involves computing the internal rate of return for subintervals defined by the dates of cash flows. Each cash flow affects the value of the investment at different times, so evaluating the investment performance in segments allows for a more accurate assessment of the returns that are attributable solely to the investment's performance, rather than the effects of contributions or withdrawals.

By focusing on the internal rate of return for each interval created by these cash flows, you can effectively measure the growth of the investment without the influence of the cash flows themselves. This approach is particularly effective for investments with varying cash inflows and outflows, as it accounts for the timing of these cash flows in relation to the overall investment performance. Thus, this calculation provides a precise view of how well the investment is performing over time.