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The Internal-Rate-of-Return approach and the AIRR paradigm: A refutation and a corroboration

  • Carlo Alberto Magni

    ()

This paper shows that the Internal-Rate-of-Return (IRR) approach is unreliable, and that the recently introduced Average-Internal-Rate-of-Return (AIRR) model constitutes the basis for an alternative theoretical paradigm of rate of return. To this end, we divide the paper into two parts: a pars destruens and a pars construens. In the "destructive" part, we present a compendium of eighteen flaws associated with the IRR approach. In the "constructive" part, we construct the alternative approach from four (independent) economic intuitions and put the paradigm to the test by showing that it does not suffer from any of the flaws previouslyinvestigated. We also show how the IRR, as a rate of return, is absorbed into the new approach.

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File URL: http://ssrn.com/abstract=2172965
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Paper provided by MASTER CONSULTORES in its series PROYECCIONES FINANCIERAS Y VALORACION with number 010084.

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Length: 40
Date of creation: 08 Nov 2012
Date of revision:
Handle: RePEc:col:000463:010084
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