Money-weighted return: IRR with calculator

CFA Level III
#1

Using my HP12c calculator to solve a MWR questions but im not sure what the IRR number that is outputed actually represents.

Simple Question:

1st of the Month Account Value = 1,000,000

5th Day of the Month: Addition to Account: $30,000

16th Day of Month: Addition to Account: $20,000

30th Day of Month (end of month): Value of Account = 1,080,000

Calculator gives me a result of .095362, which i’ve assumed equals 9.53% monthly return but i’ve seen other people turn this .095362 into a monthly return by using (1+.00095362)^30 = 2.90%

  • Why are they adding two decimal places to the .095362 that the IRR calculates?
  • Is the .095362 a daily return or a monthly return?

This is a level-I question but I can’t find an concrete answer that i’m satisfied with.

#2

The result is ‘average’ daily return throughout the 30-day month. And usually the calculator implies a % to be added to IRR. So 1 for IRR = 1%

With the average daily return, we need to link it to 30 days to have monthly return. Hope it helps.

If they replace day with month, eg May, Oct. It’ll be average monthly return for the year. It also depends on the length of the period in the measurement (here, it’s 30 day).

#3

galli - it is a average DAILY return.

#4

ah okay so .095 is actually .095% daily return. That makes this a lot more clear now…

.095% / 100 = .00095 daily = 1.00095^ 30 = 2.89% monthly

Cool, thanks for the help.

#5

@Galli - Could you please share how you solved this problem using the calculator? I have a BA II Plus but I imagine the process is similar although the buttons may be different.

I currently have:

CF0 = -1,000,000

C01 = -30,000

F01 = 1

CO2 = -20,000

F02 = 1

C03 = 1,080,000

F03 = 1

Compute IRR = 0.9648388

I’m definitely missing something and I don’t recall the CFAI text having a calculator example for something like this.

#6
  • 1st of the Month Account Value = 1,000,000
  • 5th Day of the Month: Addition to Account: $30,000
  • 16th Day of Month: Addition to Account: $20,000
  • 30th Day of Month (end of month): Value of Account = 1,080,000

CF0=-1000

C01=0. F01=4

C02=-30, F02=1

C03=0,F03=10

C04=-20,F04=1

C05=0,F05=13

C06=+1080,F06=1

point is - you need to consider these as DAILY cash flows - so intermediate days with nothing = 0 Cashflow.

#7

That’s super helpful, cpk123! Thanks a ton for sharing!

#8

just wanted to say thanks again for this. it has been frustrating me for the last few weeks how they answered BB5 in reading 32. bless cpk123 and AF… now get back to work.

#9

Came across this thread and definitely useful! Thanks . Could we use calculator if there are withdrawals? I admit cant recall how we could do that …

#10

yeah - i think we can use the opposite sign for those