What type of cash flow does the dollar-weighted return consider?

Prepare for the Principles of Investment Exam. Study with flashcards and multiple choice questions, each question has hints and explanations. Get ready for your exam!

The dollar-weighted return takes into account all cash inflows and outflows throughout the investment period. This measure reflects the actual timing and amounts of all cash flows, including initial investments, additional contributions, withdrawals, and any income received from dividends or other sources. By considering these various cash flows, the dollar-weighted return provides a more accurate reflection of an investor's actual experience with the investment over time, as it is influenced by the timing of these cash movements.

For instance, if an investor made additional contributions during periods of strong performance or pulled money out during downturns, that would impact their overall return. Thus, the dollar-weighted return captures how these decisions affect the investment outcome, leading to a comprehensive understanding of the investment's performance.

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