Chapter 4: Rates of Return

The performance of investment projects, funds and portfolios of assets is typically measured by their rates of return. The most important measure of the return of a project or fund is the internal rate of return, also called the yield rate. In this chapter we define the internal rate of return and explain how it can be applied to various investment projects. We discuss measures of 1-period rate of return, including methods such as the dollar-weighted rate of return, time-weighted rate of return, as well as some approximation methods. Performance of funds over an extended period of time can be measured by the geometric mean rate of return and arithmetic mean rate of return. We also show how returns of a portfolio can be calculated from the returns of its component assets…