Internal Rate of Return (IRR)

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

The IRR calculation takes into account cash inflows and outflows over time (or a portfolio's contributions and redemptions), using average prices weighted by the invested volume. 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is a comprehensive representation of an investment's returns during a given period, weighted by the capital invested or withdrawn, effectively placing a strong focus on the size of the Position.

Investors often use the IRR as a tool to assess the attractiveness of an investment, comparing it with other opportunities in the financial market. Although the IRR is a crucial component of investment analysis, other factors must be integrated to ensure well-founded investment decisions.

However, the IRR has its limitations. As a static figure that encapsulates the financial return of a specific period, it does not lend itself well to time-based charts or benchmark comparisons, given the portfolio's continuous inflows and/or outflows. For investors interested in a sequential visual representation of returns, the Time-Weighted Return (TWR) is a more suitable resource. Especially recommended for portfolios with multiple securities, the TWR enables performance assessments and benchmark comparisons. To learn more about the differences between TWR and IRR, visit https://gorila.com.br/blog/tir-cotizacao.

In GorilaCORE, we offer an endpoint that returns the internal rate of return of a portfolio's positions, so you can assess the financial return of each investment. For the positions of an economic group, use List Economic Group Positions Internal Rate of Return.