Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions

Alfonso Rodríguez

doi:doi:10.11648/j.ijefm.20190703.12

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Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions

Alfonso Rodríguez

Published in International Journal of Economics, Finance and Management Sciences (Volume 7, Issue 3)

Received: 13 February 2019 Accepted: 3 June 2019 Published: 5 August 2019

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Abstract

This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 7, Issue 3)
DOI	10.11648/j.ijefm.20190703.12
Page(s)	88-94
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Investment, Financing, Investment Mathematics, Financing Mathematics, Financial Profitability, Implicit Interest, IRR, PFR, Investor Degeneration

References

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[3]	Babbel, D. F. “Duration and the Term Structure of Interest Volatility”. Edited in Innovations in Bond Portfolio Management by Bierwag, Kaufman and Toevs. 1983.
[4]	Babbel, D. F. “Real Immunization with Indexed Bonds”. Financial Analysts Journal, November-December 1984.
[5]	Babcock, G. C. “Coment: Duration and Bond Portfolio Analysis”. Journal of Financial and Quantitative Analysis, November 1978.
[6]	Babcock, G. C. “Duration as a Weighted Average of two Factors”. Financial Analysists Journal, Mars-April 1985.
[7]	Bierwag, G. O. “Immunization, Duration and the Term Structure of Interest Rates”. Journal of Financial and Quantitative Analysis, December, 1977.
[8]	Bierwag, G. O. “Measures of Duration”. Economic Inquiry, October 1978.
[9]	Bierwag, G. O. “Dynamic Immunization Portfolio Policies”. Journal of Banking and Finance, April 1979.
[10]	Bierwag, G. O. and Kaufman, G. G. “Coping with the Risk of Business: A Note”. Journal of Business, Julee 1977.
[11]	Bierwag, G. O. and Kaufman, G. G. “Duration Gap for Financial Institutions”. Financial Analysts Journal, Mars-April 1985.
[12]	Bierwag, G. O., Kaufman, G. G. and Khang C. “Duration and Bond Portfolio Analysis: An Overview”. Journal of Financial and Quantitative Analysis, November 1978.
[13]	Bierwag, G. O., Kaufman, G. G., Schweitzer, R. L. and Toevs, A. “Innovations in Bond Portfolio Management: Duration, and Immunization”. JAI Press Inc. London. 1983.
[14]	Bierwag, G. O., Kaufman, G. G., and Toevs, A. “Single Factor Duration Models in a General Equilibrium Framework”. The Journal of Finance, May 1982.
[15]	Bierwag, G. O., Kaufman, G. G., and Toevs, A. “Duration: Its Development and Use in Bond Portfolio Management”. Financial Analysists Journal, Julee-August 1983.
[16]	Bierwag, G. O., Kaufman, G. G., and Toevs, A. “Immunization Strategies for Funding Multiple Liabilities”. Journal of Financial and Quantitative Analysis, Mars 1983.
[17]	Bierwag, G. O., Kaufman, G. G., and Toevs, A. “Recent Development in Bond Portfolio Immunization Strategies”. JAI Press 1983.
[18]	Bierwag, Kaufman and Toevs. “Innovations in Bond Portfolio Management: Duration Analysis and Immunization”. JAI Press Greenwich 1983.
[19]	Bierwag, G. O. and Khang, C. “An Immunization Strategy is a Minimax Strategy”. Journal of Finance, May 1979.
[20]	Fisher, I. “The theory of interest”. New York Macmillan (1930).
[21]	Fisher, L. “An algorithm for Finding Exact Rates of Return”. The Journal of Business, January 1966.
[22]	Fisher, L. and Leibowitz, M. L. “Effects of Alternative Anticipations of Yield-Curve Behavior on the Composition of Immunized Portfolios and their Targets Returns”. Innovations Management: Duration Analysis and Immunization. JAI Press. 1983.
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APA Style

Alfonso Rodríguez. (2019). Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. International Journal of Economics, Finance and Management Sciences, 7(3), 88-94. https://doi.org/10.11648/j.ijefm.20190703.12

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ACS Style

Alfonso Rodríguez. Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. Int. J. Econ. Finance Manag. Sci. 2019, 7(3), 88-94. doi: 10.11648/j.ijefm.20190703.12

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AMA Style

Alfonso Rodríguez. Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. Int J Econ Finance Manag Sci. 2019;7(3):88-94. doi: 10.11648/j.ijefm.20190703.12

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@article{10.11648/j.ijefm.20190703.12,
  author = {Alfonso Rodríguez},
  title = {Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {7},
  number = {3},
  pages = {88-94},
  doi = {10.11648/j.ijefm.20190703.12},
  url = {https://doi.org/10.11648/j.ijefm.20190703.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20190703.12},
  abstract = {This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.},
 year = {2019}
}

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TY  - JOUR
T1  - Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions
AU  - Alfonso Rodríguez
Y1  - 2019/08/05
PY  - 2019
N1  - https://doi.org/10.11648/j.ijefm.20190703.12
DO  - 10.11648/j.ijefm.20190703.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 88
EP  - 94
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20190703.12
AB  - This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.
VL  - 7
IS  - 3
ER  -

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Author Information

Alfonso Rodríguez

Department of Economic, Financial and Actuarial Mathematics, Barcelona University, Barcelona, Spain

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Plain Text BibTeX RIS

APA Style

Alfonso Rodríguez. (2019). Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. International Journal of Economics, Finance and Management Sciences, 7(3), 88-94. https://doi.org/10.11648/j.ijefm.20190703.12

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ACS Style

Alfonso Rodríguez. Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. Int. J. Econ. Finance Manag. Sci. 2019, 7(3), 88-94. doi: 10.11648/j.ijefm.20190703.12

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AMA Style

Alfonso Rodríguez. Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions. Int J Econ Finance Manag Sci. 2019;7(3):88-94. doi: 10.11648/j.ijefm.20190703.12

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@article{10.11648/j.ijefm.20190703.12,
  author = {Alfonso Rodríguez},
  title = {Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {7},
  number = {3},
  pages = {88-94},
  doi = {10.11648/j.ijefm.20190703.12},
  url = {https://doi.org/10.11648/j.ijefm.20190703.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20190703.12},
  abstract = {This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions
AU  - Alfonso Rodríguez
Y1  - 2019/08/05
PY  - 2019
N1  - https://doi.org/10.11648/j.ijefm.20190703.12
DO  - 10.11648/j.ijefm.20190703.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 88
EP  - 94
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20190703.12
AB  - This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.
VL  - 7
IS  - 3
ER  -

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