Solving the Puzzle of IRR Equation: Choosing the Right Solution to Measure Investment Success
The authors of this book published many articles in peer-reviewed professional journals, including several articles that received awards. This time, they study the problem of multiple roots of IRR equation and introduce a novel “largest root” rule for selecting the correct solution, which effectively resolves the puzzle of IRR equation. Besides this main subject of the book, other important approaches and concepts that relate to the problem and investment performance measurement are considered, such as the concept of investment context. Within this conceptual framework, the authors study and compare different methods for calculating rates of return, such as IRR, Modified Dietz, TWRR, geometric linking, NPV, MIRR, etc., and introduce improvements and generalizations of existing methods and propose several new ones. The book also considers algorithms for linking rates of return. Overall, the book provides an excellent, concise but nonetheless comprehensive, overview of investment performance measurement problems and related issues and presents well founded solutions. The book was written for a wide audience of financial industry professionals, academics and students studying finance and investment business.
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applications Ascending Curve beginning market value business meaning business perspective calculating rates cash flows cash transactions complex roots complex solutions compounding period conceptual context consider consistent linking algorithms continuous compounding correct solution different assets effective interest rates ending market value Financial mathematics financing rate Formulas 18 geometric linking operation Geometric Linking Theorem instance interest rate intermediate market values intersect the abscissa introduce investment context investment portfolio investment scenario IRR function RF IRR method j-th period largest root largest solution linking rates mathematical MIRR Modified Dietz formula Modified Dietz method Modified IRR multiple roots multiple solutions negative non-compounding context obtain the following present value previous period produce quadratic approximation rate of return reinvestment rate return for different rewrite Rule of Ascending selecting the correct sequential periods Shestopaloff 2009 smallest solution solution of IRR total period total rate TWRR value of rate whole period zero