1. What is Excess Return in Finance?

Definition: Excess return measures how much an investment outperforms or underperforms its benchmark.

Purpose: It helps investors evaluate investment performance relative to a market index or other benchmark.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( R \) — Investment return (%)
• \( B \) — Benchmark return (%)

Explanation: Simply subtract the benchmark return from the investment return to determine the excess return.

3. Importance of Excess Return

Details: Excess return helps assess investment manager skill, strategy effectiveness, and whether active management adds value.

4. Using the Calculator

Tips: Enter both the investment return and benchmark return as percentages. Positive results indicate outperformance, negative results indicate underperformance.

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 indicate good performance.

Q2: Can excess return be negative?
A: Yes, negative excess return means the investment underperformed its benchmark.

Q3: What's the difference between excess return and alpha?
A: Alpha is risk-adjusted excess return, while basic excess return doesn't account for risk.

Q4: Should I annualize excess returns?
A: For comparisons across different time periods, yes. Use the same time frame for both returns.

Q5: What are common benchmarks?
A: S&P 500 for US stocks, Bloomberg Aggregate for bonds, or sector-specific indices.