What does a dollar-weighted return reflect?

A dollar-weighted return, often referred to as the internal rate of return (IRR), measures the performance of an investment considering both the timing and the size of cash flows that occur over the investment period. This method takes into account when money is invested or withdrawn, thus reflecting how the investment's performance is influenced by these cash flows.

For instance, if significant contributions are made during a market downturn, the dollar-weighted return will be lower compared to a scenario where investments are made during a market rally, emphasizing the impact that the timing of cash flows has on overall performance. This distinguishes it from other return measures that do not factor in the cash flow magnitudes or the timing, making the dollar-weighted return a more personalized indicator of an investor’s experience with the investment.

The other options focus on aspects that do not encompass the specific nature of dollar-weighted return. For instance, the average return of an investment over time does not take cash flow timing into account, and the effect of fees on performance is a separate consideration that might impact returns but not directly reflected in the dollar-weighted measure. Thus, option C accurately captures the essence of what dollar-weighted returns signify in the context of investment performance.