modified IRR

CFA Level III
#1

Schweser study session 18 page 189

Modified IRR looks like a plain old IRR to me. Can someone show me a comparison please. If my memory server me well, this is how I always calculated IRR…

Thanks guys

#2

may make sense to read the book’s footnote on this one…

The Modified IRR method differs from the original internal rate of return method in that the exponent is the proportion of the measurement period that each cash flow is in the portfolio. Therefore, while the original IRR is a money-weighted return, the Modified IRR approximates a time-weighted return.

so while the original IRR would measure e.g. period 1, 2, 3 and so on…

here wi would refer to the time period as 1/12 if monthly or say 15/365 if cash flow occurred on the 15th day of the first month.

#3

wikipedia shows a totally different thing for MIRR than Schweser

in tis article, it appear to me that what wikipedia calls an IRR is what Schweser calls an MIRR

http://en.wikipedia.org/wiki/Modified_internal_rate_of_return

maybe a numerical example would help? anyone?

#4

If Schweser is calling the rate at which NPV = 0 the MIRR, then you need to stop using Schweser immediately. The examples in that Wiki link are very straightforward for demonstrating the difference. As cpk said, IRR is money weighted and MIRR is time weighted, so they are very different measures.