Internal Rate of Return (IRR)

In summary, we calculate internal rate of returns (IRRs) using a daily time series of net cashflows, including starting and ending balances. We aggregate time series across accounts if necessary, before calculating IRR.

Abbreviations

  • BOD: beginning of day
  • EOD: end of day
  • TWR: time-weighted return

For a Single Account

  1. Calculate time series of net cashflows, including starting and ending balances. For net deposits (but not starting balances), attribute the deposit to BOD (which is equivalent to prior day EOD). All other transactions are EOD.
  2. For a given period, calculate IRR using Newton's method and the TWR as the starting guess.

For a Group of Accounts

  1. Per account, calculate time series of net cashflows, including starting and ending balances. For net deposits (but not starting balances), attribute the deposit to BOD (= prior day EOD). All other transactions are EOD.
  2. Aggregate account-level time series of cashflows to calculate aggregated time series of cashflows.
  3. For a given period, calculate IRR using Newton's method and the TWR as the starting guess.