Internal Rate of Return

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of an investment. It represents the discount rate at which the net present value of all future cash flows from an investment equals zero. A higher IRR indicates a more attractive investment opportunity.

An investor evaluating whether to allocate capital to a trading fund or a real estate project might use IRR to compare both options. If the trading fund projects an IRR of 18% and the real estate deal offers 12%, the fund appears more attractive on a pure return basis, assuming equal risk. In a broader trading context, understanding IRR helps traders and investors set realistic performance benchmarks and evaluate whether the returns generated by their trading activity justify the capital and time being committed.