Asked by: Montaña Hensele
asked in category: General Last Updated: 14th January, 2020

What is an excess return?

Excess returns are the return earned by a stock (or portfolio of stocks) and the risk free rate, which is usually estimated using the most recent short-term government treasury bill. For example, if a stock earns 15% in a year when the U.S. treasury bill earned 3%, the excess returns on the stock were 15%-3% = 12%.

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Considering this, what is Excess Return Index?

Usually the term “excess return” refers to the total return of an index with some benchmark subtracted from it. A common benchmark is the return on cash (T bills) over that time period.

Additionally, is Alpha the same as excess return? Alpha is excess return calculated on a risk-adjusted basis. The job of an active fund manager is to provide excess returns on a risk-adjusted basis, NOT just excess return.

Subsequently, one may also ask, how do you calculate excess return?

Excess return is identified by subtracting the return of one investment from the total return percentage achieved in another investment. When calculating excess return, multiple return measures can be used. Some investors may wish to see excess return as the difference in their investment over a risk-free rate.

Is risk premium the same as excess return?

Many experts claim that there is no reason why some type of premium should be associated with all types of risk. In other words, a risk premium is the expected excess return on an investment, where the excess return is the difference between the return of a risk-free security and an actual return.

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What is considered high tracking error?

Low tracking error means a portfolio is closely following its benchmark. High tracking errors indicates the opposite. Thus, tracking error gives investors a sense of how "tight" the portfolio in question is around its benchmark or how volatile the portfolio is relative to its benchmark.

What is the risk free return?

Risk-free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risk. The risk-free rate represents the interest on an investor's money that would be expected from an absolutely risk-free investment over a specified period of time.

What are raw returns?

Raw stock returns are untested, unchecked stock returns, usually a mix pallet of faulty and damaged goods. Goods may include products with missing parts. This type of stock is the most discounted you can buy from a liquidator.

What is absolute tracking error?

Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge fund, mutual fund or exchange-traded fund (ETF) that did not work as effectively as intended, creating instead an unexpected profit or loss.

What is an index return?

The total return index is a type of equity index that tracks both the capital gains of a group of stocks over time, and assumes that any cash distributions, such as dividends, are reinvested back into the index. Looking at an index's total return displays a more accurate representation of the index's performance.

How do you interpret tracking errors?

Tracking error is formally defined as the standard deviation of the difference between the returns of the portfolio and the returns of the benchmark—or the dispersion of the excess portfolio returns compared with its benchmark. It's typically expressed both as an annualized number and as a percentage.

Can expected return negative?

An investment has a negative rate of return when it loses value over a measured time period. If, in the following year, the mutual fund described above decreases in value from $11,000 back to $10,000, its rate of return for that year is approximately negative 9%.

How do you calculate Active return?

The active return is obtained by deducting the investment return that is as a result of the overall market movements from the benchmark. The fund will be considered to have earned a positive active return if the actual return surpasses the market index.

What is risk premium formula?

The formula for risk premium, sometimes referred to as default risk premium, is the return on an investment minus the return that would be earned on a risk free investment. The risk premium is the amount that an investor would like to earn for the risk involved with a particular investment.

What is expected return on stock?

The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results.

What is the CAPM formula?

The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate.

What is tracking error of a portfolio?

In finance, tracking error or active risk is a measure of the risk in an investment portfolio that is due to active management decisions made by the portfolio manager; it indicates how closely a portfolio follows the index to which it is benchmarked. Many portfolios are managed to a benchmark, typically an index.

What is a Sharpe Ratio example?

The Sharpe ratio is a measure of return often used to compare the performance of investment managers by making an adjustment for risk. For example, Investment Manager A generates a return of 15%, and Investment Manager B generates a return of 12%.
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