Dollar-Weighted Return
The internal rate of return on an investment portfolio, accounting for the timing and size of all cash flows.
What is Dollar-Weighted Return?
Dollar-weighted return (DWR), also called money-weighted return (MWR), is the IRR that equates the present value of all cash outflows (beginning value and withdrawals) with the present value of all cash inflows (deposits and ending value) in a portfolio. Unlike time-weighted return, DWR is heavily influenced by when cash enters or exits the portfolio, making it an accurate reflection of the actual investor experience but an unsuitable tool for comparing fund managers who do not control client cash-flow timing. An investor who adds a large sum just before a market decline will show a lower DWR than the fund's published time-weighted return. DWR is the standard performance measure in private equity, where capital calls and distributions are controlled by the GP.
Example
An investor starts with $100,000, earns a 20% gain (portfolio = $120,000), then deposits $50,000 (portfolio = $170,000), followed by a 10% loss ending at $153,000. The dollar-weighted return is approximately 5.4%, below the 8% time-weighted return, because the large mid-period deposit amplified the loss in dollar terms.