What is a drawback of the time-weighted rate of return?

The correct answer highlights a significant drawback associated with the time-weighted rate of return (TWRR). While TWRR is a preferred method for measuring the performance of investment portfolios over time, it can indeed become costly and error-prone, especially when calculations involve multiple cash flows occurring at different times.

The TWRR requires precise calculations for partitioning the returns into segments that only account for the performance of the investment itself, excluding the impact of external cash flows. This complexity can lead to errors if cash flows are not tracked accurately, necessitating diligent record-keeping and data management, which may incur additional costs for investment managers.

By recognizing these intricacies, investors and firms must consider the potential pitfalls associated with the time-weighted rate. It is essential to maintain meticulous records and possibly invest in robust investment management systems to ensure accuracy, thereby justifying the assertion reflected in the chosen answer.