What does the money-weighted rate of return reflect?

The money-weighted rate of return reflects the compound growth rate of all funds invested over the evaluation period. This measure takes into account the timing and amount of cash flows into and out of the investment, making it particularly sensitive to the timing of contributions and withdrawals. It provides a value that essentially captures the internal rate of return on the total invested capital.

This method is useful for investors as it accurately reflects the returns experienced by the investor based on their own contributions. Therefore, if an investor makes larger contributions at times when the investment performs well, the money-weighted return shows a higher return because it factors in these specific cash flows effectively.

In contrast, the other options do not accurately describe the essence of the money-weighted rate of return. For example, the average market return speaks only to overall market performance without individual investment context, while cumulative fees address cost aspects rather than returns. Historical performance of competitor accounts does not relate to individual investor experience and return calculation. Hence, the money-weighted rate of return is distinct in its focus on the specific investments made by an individual over time.