CFA Level 2 | 7fkkq2x | Question Understanding IRR in Pri...

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Understanding IRR in Private Equity Performance Measurement

Easy Private Equity Valuation Performance Measurement

In private equity, valuation and performance measurement are critical in assessing the success of invested capital over time. Fund managers often utilize various metrics to evaluate fund performance accurately. One common performance measure used in private equity is the Internal Rate of Return (IRR).

Which of the following statements accurately reflects the nature of IRR in the context of private equity performance measurement?

IRR considers the timing and magnitude of cash flows, making it a reliable measure for comparing investment performances across different scenarios.

IRR does not account for the reinvestment of cash flows, thus it can provide misleading information if cash flows are significantly varying.

IRR is less useful when the cash flow pattern consists of multiple sign changes, as it can yield multiple IRR solutions.

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