
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.

Professionals
Rates of Return
FINRA/NASAA Series 66 Section 1  Rates of Return. In this section internal rate of return (IRR), real return, expected return and riskadjusted return. 
Professionals
Measuring Portfolio Returns
NASAA Series 65: Section 16 Measuring Portfolio Returns. In this section different types of risk measures discussed and some sample questions. 
Professionals
Measuring Portfolio Risks
FINRA/NASAA Series 66: Section 5 Measuring Portfolio Risks. This section discusses different risk measures: Beta, Alpha and the Sharpe Ratio. 
Professionals
Stock Risks
NASAA Series 65: Section 16 Stock Risks. In this section types of risks, quantitative analysis and risk measures associated to stock markets. 
Professionals
Introduction
FINRA/NASAA Series 66: Section 2 Measuring Portfolio Returns. This section discusses different return measures: return on investment, holding period, annualized, risk free and total returns. 
Professionals
Internal Rate Of Return
Find out how to use IRR to analyze capital budgeting projects. 
Fundamental Analysis
Return on Investment (ROI) Vs. Internal Rate of Return (IRR)
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Fundamental Analysis
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
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. 
Mutual Funds & ETFs
5 Ways To Measure Mutual Fund Risk
These statistical measurements highlight how to mitigate risk and increase rewards.

Internal Rate Of Return  IRR
A metric used in capital budgeting measuring the profitability ... 
The Net Internal Rate Of Return ...
A measure of a portfolio or fund's performance that is equal ... 
IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Pooled Internal Rate Of Return ...
A method of calculating the overall internal rate of return (IRR) ... 
RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
Beta
Beta is a measure of the volatility, or systematic risk, of a ...

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