MIRR

MIRR, or Modified Internal Rate of Return, is a financial metric that improves on the traditional IRR by addressing its limitations, particularly the assumption that cash flows are reinvested at the same rate as the IRR itself. MIRR assumes that positive cash flows are reinvested at the firm's cost of capital and that initial outlays are financed at the financing cost. It provides a more realistic measure of an investment's profitability.

An investment fund evaluating two trading strategies might use MIRR to compare their profitability more accurately than a simple return calculation. If Strategy A has an IRR of 20% but the realistic reinvestment rate for its profits is only 8%, the MIRR would be lower and provide a more honest picture of performance. For traders and capital allocators, MIRR is a useful tool when assessing the true returns of multi-period trading strategies or investment programmes where profits are periodically withdrawn or reinvested.