
Quantitative Methods of Evaluating Businesses and Investments  Rates of Return  Internal Rate of Return
Different measures can be used when discussing potential rates of return.
Internal Rate of Return (IRR)
The IRR is essentially the interest rate that makes the net present value of all cash flow equal zero. It represents the return a company would earn if it expanded or invested in itself rather than elsewhere.
The internal rate of return used in time value of money calculations cannot be directly found by formula. It can be approximated by trial and error, but in the real world it is simply found by inputting present value, future value, and the number of compounding periods into a financial calculator.
Several measures of return can be selected for such a calculation:
 Real return  also known as inflationadjusted return. By adjusting the stated (nominal) return of an investment to take inflation into account, the investor will have a more realistic assessment of return. So, if an investor were to earn 8% on an investment and inflation is 3%, the real rate of return would be approximately 5% (excluding any fees). Learn more about this in the section on Bond Yields.
 Riskadjusted return  this calculation allows an investor to determine if the amount of return received is commensurate with the risk taken. There are several methods to measure riskadjusted return that incorporate either beta (a measure of a portfolio's market risk) or standard deviation (a measure of a portfolio's total risk) and the riskfree return (typically measured by the current rate on shortterm Treasury bills). The most common method of measuring riskadjusted return is the Sharpe Ratio, which is calculated by subtracting the riskfree rate of return from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
 Beta is a measure of volatility or systematic risk relative to the market as a whole. If beta = 1, the security's price will move with the market. If beta < 1, the security will move to a lesser extent than the market. If beta > 1, the security will move at a greater pace than the market.
The following two articles on beta are worth a read if Beta is a new concept for you:
 Standard Deviation is a statistical concept that measures the dispersion of a set of data from its mean (average). So, if the average return for an investment over the last 5 years was 11.5%, and yearly returns for the past 5 years was 9.5%, 8.5%, 13.9%, 9.1% and 16.5%, standard deviation would measure how the return for each of those 5 years differed from the mean. Standard deviation is a measure of total risk for an individual security or an overall portfolio. Beta, on the other hand, measures only its systematic risk relative to the market.
Note that you will not have to calculate standard deviation in your upcoming Series 65 exam.
 Total return  incorporates the rate of return from all sources, including appreciation (or depreciation), dividends and interest. This is the actual rate of return an investment provided over a certain period of time.
Look Out! Look for questions on both the definition of total return and the inflation component of real return. Hint: Any answers that involve risk are normally incorrect. 
Exam Tips and Tricks Consider this sample question: 
 Which of the following statements is least accurate with respect to how certain factors may impact internal rate of return (IRR)?
 If the required return exceeds the project's IRR, the project should be accepted.
Holding Period ReturnThe correct answer is "a". The IRR of the project is also the return expected from it. Therefore, if the required return exceeds the project's IRR (or expected return), the project should be rejected because it is not expected to generate return to compensate for the risk.

Fundamental Analysis
Calculating the Internal Rate of Return Using Excel
The internal rate of return on investments is explained and illustrated in different investment scenarios. 
Fundamental Analysis
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Forex
Understanding Internal Rate Of Return
Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric. 
Investing Basics
More Ways to Evaluate Portfolio Performance
The Jensen measure is another tool investors use to include risk when measuring portfolio performance. 
Fundamental Analysis
How To Measure Your Portfolioâ€™s Performance
The first tool for assessing portfolio performance while considering risk was the Treynor measure. 
Investing
Measure Your Portfolio's Performance
Learn three ratios that will help you evaluate your investment returns. 
Fundamental Analysis
Is Apple's Stock Over Valued Or Undervalued?
Despite several drawbacks, the CAPM gives an overview of the level of return that investors should expect for bearing only systematic risk. Applying Apple, we get annual expected return of about ... 
Fundamental Analysis
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk. 
Forex Education
How to Calculate Required Rate of Return
The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it. 
Investing Basics
Calculating Beta: Portfolio Math For The Average Investor
Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.

The Net Internal Rate Of Return ...
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Return
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International Beta
Better known as "global beta", international beta is a measure ... 
InflationAdjusted Return
A measure of return that accounts for the return period's inflation ...

How does beta measure a stock's market risk?
Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >> 
What is the formula for calculating internal rate of return (IRR) in Excel?
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What is the formula for calculating the internal rate of return (IRR)?
Learn about the internal rate of return, an important concept in determining the relative attractiveness of different investments. Read Answer >> 
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Find out how companies and managers use hurdle rate, or MARR, and internal rate of return, or IRR, to evaluate projects and ... Read Answer >> 
Why is the Modified Internal Rate Of Return (MIRR) preferable to the regular internal ...
See why the modified internal rate of return is often a superior metric to the classic internal rate of return for assessing ... Read Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
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