Scenario Weighting

Probability-weights base, upside, and stress IRRs into an expected IRR and contrasts it with the simple three-way average. Inputs are the levered IRR and probability weight for each of the three scenarios.

Interactive Tool

Scenario Weighting

Base case

Levered IRR

Probability weight

Upside case

Levered IRR

Probability weight

Stress case

Levered IRR

Probability weight

Probability-weighted IRR

14.1%

expected return

Simple average

13.7%

ignores the weights

The weighted IRR (≈14.1%) differs from the 13.7% simple average because the weights are a statement of confidence. Shift weight toward the stress case and the expected return falls, that is the conviction made explicit.

Learn the concept

This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.

Open Real Estate Finance

Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.