Weighted IRR Calculator
Quickly determine the aggregate performance of your investment portfolio by learning how to calculate weighted IRR correctly.
Portfolio Performance Calculator
Enter your assets below to calculate the weighted average Internal Rate of Return.
Asset #1
Initial equity or current value.
Please enter a valid amount.
Expected or realized annual return.
Asset #2
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Asset #3
Please enter a valid amount.
Asset #4 (Optional)
Asset #5 (Optional)
Weighted Average IRR
0.00%
This is the aggregate return of your portfolio based on capital weight.
Total Capital Invested
$0
Active Assets
0
Best Performer
0.0%
Portfolio Capital Allocation
Visual representation of capital distribution across assets.
| Asset | Capital ($) | Weight (%) | IRR (%) | Weighted Contribution |
|---|
How to Calculate Weighted IRR: A Comprehensive Financial Guide
Understanding how to calculate weighted IRR (Internal Rate of Return) is a fundamental skill for portfolio managers, real estate investors, and financial analysts. While calculating the IRR for a single investment tells you how well that specific project is performing, it does not give you the full picture of your aggregate portfolio performance.
This guide will walk you through the definition, the mathematical formula, real-world examples, and the critical factors that influence your weighted returns. Whether you are managing a real estate syndication or a diverse stock portfolio, mastering this metric is key to making informed capital allocation decisions.
What is Weighted IRR?
Weighted IRR is a financial metric used to determine the aggregate performance of a portfolio consisting of multiple investments with varying sizes and returns. Unlike a simple average, which treats all investments equally, a weighted average accounts for the fact that a return on a $1,000,000 investment impacts your wealth significantly more than a return on a $10,000 investment.
This metric is particularly popular in:
- Private Equity & Real Estate: Investors often hold stakes in multiple properties or companies. The Weighted IRR summarizes the overall efficiency of the deployed capital.
- Fund Management: Fund managers report weighted returns to show potential investors the historical performance of their strategy across various deals.
- Corporate Finance: Companies use it to assess the combined return of various business units or capital projects.
Weighted IRR Formula and Mathematical Explanation
To understand how to calculate weighted irr, you must first calculate the weight of each investment relative to the total capital deployed. The formula is a sum of the products of each investment's weight and its specific IRR.
Weighted IRR = ∑ ( (Capital Investedi / Total Capital) × IRRi )
Where:
| Variable | Meaning | Unit | Typical Range |
|---|---|---|---|
| Capital Investedi | Amount of money invested in asset i | Currency ($) | > 0 |
| Total Capital | Sum of all capital invested across the portfolio | Currency ($) | > 0 |
| Weight | Percentage of portfolio allocated to asset i | Percentage (%) | 0% – 100% |
| IRRi | Internal Rate of Return for asset i | Percentage (%) | -100% to 100%+ |
Step-by-Step Derivation
- Sum Total Capital: Add up the initial investment amounts for all assets in the portfolio.
- Calculate Weights: Divide each individual investment amount by the Total Capital. This gives you a decimal (e.g., 0.25 for 25%).
- Determine Contribution: Multiply the weight of each asset by its specific IRR.
- Sum Contributions: Add all the weighted contributions together to get the final Weighted Average IRR.
Practical Examples (Real-World Use Cases)
Example 1: The Uneven Real Estate Portfolio
Imagine a real estate investor with two properties. They often ask how to calculate weighted irr when one property is much more expensive than the other.
- Property A: $900,000 investment with a 10% IRR.
- Property B: $100,000 investment with a 30% IRR.
Calculation:
- Total Capital = $1,000,000
- Weight A = $900k / $1m = 90%
- Weight B = $100k / $1m = 10%
- Contribution A = 90% * 10% = 9%
- Contribution B = 10% * 30% = 3%
- Weighted IRR = 9% + 3% = 12%
Interpretation: Even though Property B had a massive 30% return, the portfolio overall only achieved 12% because the vast majority of the capital was tied up in the lower-yielding asset.
Example 2: Venture Capital Diversification
A VC firm invests in three startups:
- Startup X: $2M at -50% IRR (Loss)
- Startup Y: $2M at 15% IRR
- Startup Z: $1M at 100% IRR (Home run)
Total Capital = $5M.
- Start X (40% weight): 0.40 * -50 = -20.0% contribution
- Start Y (40% weight): 0.40 * 15 = +6.0% contribution
- Start Z (20% weight): 0.20 * 100 = +20.0% contribution
- Weighted IRR = -20 + 6 + 20 = 6%
This positive aggregate result highlights why diversification is critical in high-risk investing.
How to Use This Weighted IRR Calculator
Our tool simplifies the math. Here is how to get the most out of it:
- Input Capital: Enter the initial equity or investment amount for up to 5 assets. Ensure you use the same currency for all inputs.
- Input Returns: Enter the IRR for each corresponding asset. This can be a projected IRR from a pro-forma or a realized IRR from a past sale.
- Review Weights: As you type, the chart will update to show you how concentrated your portfolio is in certain assets.
- Analyze Results: Look at the "Weighted Average IRR" in the blue box. This is your headline number. The breakdown table below shows exactly which asset is driving that number up or down.
- Copy & Share: Use the "Copy Results" button to save the data for your reports or client emails.
Key Factors That Affect Weighted IRR Results
When learning how to calculate weighted irr, consider these external factors that influence the final number:
- Asset Allocation (Weighting): As seen in Example 1, heavy allocation to a low-performing asset drags down the entire portfolio, regardless of small "wins" elsewhere.
- Investment Duration: IRR is time-sensitive. A 20% IRR achieved over 1 year is different from a 20% IRR sustained over 10 years, though the weighted math treats the percentages simply.
- Cash Flow Timing: The weighted average method is an approximation. True portfolio IRR would require aggregating all cash flows on specific dates. Large early cash distributions improve actual IRR significantly.
- Fees and Expenses: Ensure your input IRRs are "net of fees." Management fees, transaction costs, and carried interest reduce the effective capital working for you.
- Leverage: Using debt increases the equity IRR if the asset performs well, but increases risk. Highly leveraged assets in your portfolio will have more volatile IRRs.
- Tax Implications: Pre-tax and post-tax IRRs can differ vastly. When calculating a weighted average, ensure all inputs are either pre-tax or post-tax for consistency.
Frequently Asked Questions (FAQ)
Is Weighted Average IRR the same as Portfolio IRR?
Not exactly. Weighted Average IRR is a mathematical approximation taking the average of percentages. True "Portfolio IRR" involves summing all cash flows from all projects on a timeline and running the XIRR function. However, the weighted average is widely used as a close proxy.
Can I have a negative Weighted IRR?
Yes. If your largest investments have negative returns (losses), your weighted average will likely be negative, even if some smaller investments are profitable.
Should I weight by initial investment or current value?
Standard practice is to weight by Invested Capital (cost basis). Weighting by current value is useful for analyzing future expected returns, but for historical performance, use the initial capital.
How does this differ from ROI?
ROI (Return on Investment) measures total profit relative to cost. IRR accounts for the time value of money. A project that doubles your money in 1 year has a much higher IRR than one that doubles it in 10 years, though the ROI is the same (100%).
What is a good Weighted IRR?
It depends on the asset class. For core real estate, 7-10% is common. For value-add real estate, 12-18%. For Venture Capital, investors often seek 20%+. Context is key.
How do I handle assets with $0 investment?
If you didn't invest capital (e.g., sweat equity), the IRR calculation breaks (division by zero). These assets typically aren't included in a capital-weighted calculation.
Why is the result different from a simple average?
A simple average assumes you invested the exact same amount in every deal. Weighted IRR corrects for the reality that you bet different amounts on different assets.
Can I use this for stocks?
Yes. You can use the cost basis of your stock lots as the "Capital Invested" and the CAGR (Compound Annual Growth Rate) of each stock as the "IRR" to find your portfolio's weighted performance.
Related Tools and Internal Resources
Explore more financial tools to optimize your investment strategy:
- ROI Calculator – Calculate simple Return on Investment without time value complexity.
- Cap Rate Calculator – Essential for evaluating real estate income properties.
- CAGR Calculator – Determine the compound annual growth rate for any asset.
- Net Present Value (NPV) Tool – Discount future cash flows to today's value.
- Cash on Cash Return Guide – Measure annual cash income relative to cash invested.
- Asset Allocation Strategy – Learn how to balance risk and reward in your portfolio.