1. What is Excess Return?

Excess return is the difference between the return of an investment and the return of a benchmark. It measures how much an investment has outperformed (or underperformed) its benchmark.

2. How Does the Calculator Work?

The calculator uses the excess return formula:

Where:

• Return — The percentage return of the investment
• Benchmark Return — The percentage return of the benchmark index or comparable investment

Explanation: A positive excess return indicates outperformance, while a negative value indicates underperformance relative to the benchmark.

3. Importance of Excess Return

Details: Excess return is crucial for evaluating investment performance, assessing fund manager skill, and comparing investment strategies against market benchmarks.

4. Using the Calculator

Tips: Enter both the investment return and benchmark return as percentages. The calculator will compute the difference between them.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good excess return?
A: This depends on the asset class and risk level. Generally, consistent positive excess returns over time indicate good performance.

Q2: Should I annualize the returns first?
A: For accurate comparison, ensure both returns cover the same time period (both annualized or both for the same period).

Q3: What benchmarks are commonly used?
A: Common benchmarks include S&P 500 for US stocks, MSCI World for global stocks, and Barclays Aggregate for bonds.

Q4: How does excess return differ from alpha?
A: Alpha is risk-adjusted excess return, while basic excess return doesn't account for the risk taken to achieve the return.

Q5: Can excess return be negative?
A: Yes, negative excess return means the investment underperformed its benchmark.