Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) serves as a financial metric designed to assess the attractiveness of an investment. Essentially, the IRR represents the expected return rate based on the investment's projected future cash flows, which encompass revenues, expenses, and other associated costs throughout a specified timeframe. It is sometimes referred as the Money-Weighted Rate of Return.

The IRR computation takes into account these cash inflows and outflows over time (or a portfolio's redemptions and contributions), utilizing average prices weighted by the volume invested. As such, the IRR is a comprehensive representation of an investment's returns during a given period, weighted by the capital invested or withdrawn, effectively putting a large focus on the position size.

Investors often employ IRR as a tool to gauge the potential appeal of an investment, contrasting it with other opportunities in the financial market. While IRR proves to be a crucial component of investment analysis, other factors should be integrated to ensure well-informed investment decisions.

Nevertheless, the IRR does have its limitations. As a static figure encapsulating the financial return of a specified period, it doesn't lend itself well to temporal charting or benchmark comparisons, given the portfolio's ongoing inflows and/or outflows. For investors keen on a time-sequenced visual representation of returns, Time-Weighted Return (TWR) is an effective resource. Particularly favored for portfolios with multiple assets, TWR enables performance assessments and benchmark comparisons. To learn more about the differences between TWR and TIR, visit https://gorila.com.br/blog/tir-cotizacao.

In GorilaCORE, we feature an endpoint that returns the IRR for a given portfolio’s positions so you can assess the financial return of each invesment.