Which factor impacts the dollar-weighted return significantly?

The timing of cash flows significantly impacts the dollar-weighted return because this method of calculating return takes into account when investments are made and when withdrawals occur. Unlike time-weighted returns, which only measure the performance of the investment itself over time without accounting for cash flows, dollar-weighted returns adjust the average performance based on the size and timing of cash inflows and outflows.

When cash flows occur at different times, they can greatly affect the overall return because the value of money is not static over time. For instance, if substantial cash is invested at a high point before a market decline, the return will be adversely affected compared to cash invested at a low point when prices are rising. This makes the timing of these cash flows a critical factor in assessing the true performance of the investment from the perspective of the investor.

In contrast, other factors listed do not have the same direct relationship with dollar-weighted returns. For example, while overall market performance can influence investment outcomes, it does not alter the specific impacts of cash flow timing on an individual's investment return. Likewise, the risk-free interest rate and portfolio diversification are important in certain contexts but do not affect how cash flows in and out influence dollar-weighted returns as directly.