The Average-Internal-Rate-of-Return Approach for Investment Performance Measurement

Abstract:     
This paper introduces a new method of investment performance analysis, based on the recent approach of Average Internal Rate of Return (AIRR). We show that the approach generates rates of return which measure both a fund’s performance and a manager’s performance. The metrics proposed are arithmetic means of holding period rates weighted by the fund’s market values. The Internal Rate of Return (IRR) is shown to be a particular case of AIRR, that is, a weighted arithmetic mean of holding period rates associated with interim values which differ from market values. The manager’s AIRR is shown to be the true period equivalent of the Time Weighted Rate of Return (TWRR).

Number of Pages in PDF File: 29

Keywords: performance measurement, AIRR, value added, internal rate of return, time-weighted rate of return

JEL Classification: G00, G10, G11, G12, G31

working papers series