
Different measures can be used when discussing potential rates of return.
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:
 Internal rate of return (IRR)  This interest rate makes the net present value of a series of cash flows equal to zero. The IRR can only be calculated by trial and error (or with a financial calculator) unless the investment has only a single cash flow, in which case the calculation is as follows:
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Internal rate of return = Payoff / Investment  1
An example of this would be an investment of $1,000 that would return $1,100 in one yearÂ The formula would produce 1100/1000  1 which equals 1.10  1 which equals .10 (10%).
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Look Out!
The fact that internal rate of return presumes that the net present value of the inflows and outflows equals zero seems counterintuitive. It may be helpful to think of the internal rate of return as the discount rate at which the expected returns equal the initial investment. However, on the exam, "net present value equals zero" will be the correct answer.
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Real return  This is also known as inflationadjusted return. By adjusting the stated (nominal) return of an investment to consider inflation, the investor has a more realistic assessment of return. Learn more about this in the Measuring Portfolio Returns section on Bond Yields.
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Expected return This is the average of the probability distribution of possible returns, calculated by taking the probability of each possible return outcome and multiplying it by the return outcome, then adding each of these together to get the expected return.
Â  Riskadjusted return  This calculation allows an investor to determine if the amount of return received is commensurate with the risk taken. It incorporates both beta and the riskfree rate of return (typically the current rate of shortterm Treasury bills).
Look Out!
Look for questions on both the definition of total return and the inflation component of real return. Any answers that involve risk are incorrect.
Look Out!
Consider this sample question:
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A client buys a DEF 10% bond at 105. The bond matures in 10 years. What is the current yield?
 10.17%
 9.52%
 9.69%
 9.13%
The correct answer is "b", since current yield is found by dividing the annual interest payment (in this case $100) by the current market price (in this case $1.050).
Introduction

Small Business
Calculating the Internal Rate of Return Using Excel
The internal rate of return on investments is explained and illustrated in different investment scenarios. 
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Explaining Expected Return
The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome. 
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Internal Rate of Return Formula for Excel
The internal rate of return, or IRR, is a popular metric businesses use to measure a projectâ€™s return on investment. 
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More Ways to Evaluate Portfolio Performance
The Jensen measure is another tool investors use to include risk when measuring portfolio performance. 
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How to Calculate Risk Premium
Think of a risk premium as a form of hazard pay for risky investments. 
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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. 
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Explaining RiskAdjusted Return
Riskadjusted return is a measurement of risk for an investment or portfolio. 
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How to Calculate Required Rate of Return
Investors use the required rate of return to decide where to put their money, and corporations use it to decide if they should pursue a new project. 
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Internal Rate of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Financial Advisor
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.