Both the internal rate of return (IRR) and the net present value(NPV) methods present well-known limitations. The drawbacks of the IRR include multiple rates, the assumption that cash flows are reinvested at the IRR, and the scale effect, whereas in the case of NPV the limitations relate to the choice of the measurement units as well as to the project's scale. In many cases, applying these two methods produces conflicting rankings for alternative investment projects. Two alternative models were developed to overcome these pitfalls: the modified internal rate of return method (MIRR), which overcomes the IRR's limitations, and the profitability index (PI), which resolves the limitations of NPV. The purpose of this paper is to show that there are no inconsistencies between the PI and MIRR, and that it is preferable to use a modified rate, the MPI, which is obtained by subtracting the cost of capital from the standard PI.
Resumo O presente trabalho investiga o comportamento de diversos tipos de investidores no âmbito de suas atividades de compra e venda de ativos no mercado de ações brasileiro. Para tanto, observa-se, de forma agregada, como o volume de compra e venda se relaciona com o retorno passado e o retorno futuro do mercado. Destacam-se os resultados para os investidores do grupo pessoa física e investidores estrangeiros. Para o grupo pessoa física, observam-se sinais de comportamento orientado por Efeito Disposição, dado que se encontra evidência de que o grupo de investidores tende a elevar suas vendas após altas elevadas do mercado, mas o mesmo não ocorre com a mesma intensidade após quedas passadas. Para investidores estrangeiros, nota-se que o mesmo é o único a indicar correlação positiva e significante com retornos passados e também futuros. O resultado indica que o comportamento do grupo de investidores é guiado por estratégias de Momentum e que existem sinais de maior habilidade no processamento das informações, tendo em vista que suas carteiras apresentam melhor desempenho.
Purpose -We investigate the drivers of investment flows into Brazilian mutual funds.Design/methodology/approach -The database consists of a panel of Brazilian mutual funds covering the period between January 2001 and April 2019. First, we identify which performance metric is most related to the funds' flows. Then we analyze how the results differ depending on investor sophistication.Findings -Investors pay more attention to market risk (beta) when evaluating funds, while they attribute returns tied to size, value, momentum, and industry factors to the alpha. These results are consistent with those reported for the United States. Additionally, we document that less sophisticated investors are relatively more sensitive to all past return metrics. However, when fund alphas are broken down into a persistent component and a random component, greater sensitivity is concentrated in the random component of the alphas.Originality/value -The sensitivity of fund flows to different performance metrics is measured, and this allows us to better understand investors' decision-making processes. Moreover, to the best of our knowledge, this is the first paper to address this issue with data from outside the United States.
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