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Subject: Re: [office-comment] Statistical SUMMARY() function


Sheldon,  your passage refers to "External Rate of Return" not "Economic 
Rate of Return".  Are you saying that these are the same?  I have other 
sources that say IRR and Economic Rate of Return are the same. 

I wonder if you are really trying to get to what portfolio managers called 
"time weighted return" versus "dollar weighted return"?  The time-weighted 
calculation accounts for the fact that the amount of invested capital 
changes over time. 

If so, that is something to consider for a future ODF version.  I'd also 
like to see portfolio alpha, beta and Sharpe ratio functions, as well and 
Markowitz optimization.

-Rob


Sheldon Britton <sab_orion@verizon.net> wrote on 06/04/2008 07:04:22 PM:

> Hi Robert,
> 
> With regards to the following; Re: "From what I can gather the term 
> "economic rate of return" has multiple meanings. In IDB use, where 
> it is abbreviated as EIR not ERR, it uses a calculation involving 
> shadow pricing to account for economic opportunity costs. To me this
> sounds like something that one would do in a model in a spreadsheet,
> not as a single spreadsheet function...." 
> 
> Incidentally, the below attached information which discusses this 
> very subject was gleaned some time ago on the web and reads in part 
> as follows:-
> "Please note that for each of the five investments (A-E) in Exhibit 
> 1, no reinvestment of the intermediate cash flows is necessary nor 
> required to earn the 15% IRR on the periodic and usually ever-
> changing internally invested amounts of capital. In fact, to 
> "reinvest" the two intermediate cash flows (CF^sub 1-2^ in these 
> three-period investments) would be to make two additional and 
> separate investments external to the original three-period 
> investments. Any rate of return calculated to include these 
> reinvested amounts, combined with the original cash flows 
> appropriately would/should be called the External Rate of Return 
> (ERR). Hence, profiling the IRR and defining the ERR unequivocally 
> settles the reinvestment rate controversy. The IRR does not assume 
> nor implicitly require the reinvestment of the intermediate cash 
> flows of an investment, while the ERR does assume and explicitly 
> require the reinvestment of the intermediate cash flows of an 
investment.
> Said ERR may also be called a "portfolio IRR," because it is the 
> geometric mean (weighted average) rate of return for more than one 
> investment held for varying time periods, since each successive 
> reinvested cash flow is invested for one time-period less than that 
> of the previous reinvested cash flow.
> The generic term ERR is preferred since it encompasses all of the 
> variations on the same theme, namely the adjusted IRR, the modified 
> IRR, the terminal value IRR, the Estate Management Rate of Return 
> (EMRR) and even the Financial Management Rate of Return (FMRR)...."
> http://www.allbusiness.com/personal-finance/investing/1035174-1.html
> 
> from the foregoing therefore, one would assume that the "generic 
> term ERR is preferred" and undoubtedly represents an "spreadsheet 
> function" (now absent) that must/should now be integrated and listed
> formally as such.
> 
> Thank you.
> 
> Best regards,
> 
> Sheldon.
> 
> robert_weir@us.ibm.com wrote: 
> Hi Sheldon,
> 
> >From what I can gather the term "economic rate of return" has multiple 
> meanings.  In IDB use, where it is abbreviated as EIR not ERR, it uses a 

> calculation involving shadow pricing to account for economic opportunity 

> costs.  To me this sounds like something that one would do in a model in 
a 
> spreadsheet, not as a single spreadsheet function.  Consider:  each of 
> your cash flows could involve an arbitrary discount based on what are 
> essentially project-specific judgement calls as well as addition costs 
to 
> reflect social or environmental costs.  Do you think these assumptions 
> would make a cohesive spreadsheet function?  If so, what would the 
> function look like?  What would its parameters be?
> 
> Regards,
> 
> -Rob
> 
> Sheldon Britton <sab_orion@verizon.net> wrote on 06/04/2008 03:33:26 PM:
> 
> 
> Hi Robert,
> 
> Thank you very much for the timely response and the opportunity to 
> raise the question.
> 
> From working experience I am now also taking the opportunity to 
> forward documentation (see attachment) which describes the 
> procedures for the return/computation of Economic Rate of Return 
> (ERR) values as distinct from those of the return/computation of 
> Internal Rate of Return (IRR) as defined in formula listings of 
> OpenOffice's Calc, IBM's Lotus 1-2-3, IBM's Lotus Symphony's 1.0 
> SpreadSheet et cetera et cetera.
> 
> Re: "So how to turn an IRR into an ERR? I suppose the joke answer 
> would be "Invest in sub-prime  mortgages"; Wow... (was that "ENRON" 
> or "sub-prime" ;-) ! 
> Response: Which better company to be with other than the one (IBM) 
> which now have the responsibilities for the Federal Housing Loans 
> origination port folio; and, beyond these let us look at the "
> services opportunities" (delivery solutions...) in the world's 
> energy and commodities markets (food...) among others in that IBM's 
> "Lotus Symphony" like "OpenOffice" can be freely obtained. $$$ :-D 
> 
> Also, "But seriously, my understanding is that Internal Rate of 
> Return, as we define it in OpenFormula, is the same as what some 
> practitioners call "Economic Rate of Return". 
> 
> The attached documentation which describes "Economic Rate of Return"
> employed by the Inter-American Development Bank ( http://www.iadb.org
> ) I am quite sure will undoubtedly provide some clarification and 
> further understanding about this issue.
> 
> 
> 


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