Relative return

Relative return

Relative return is a measure of the return of an investment portfolio relative to a theoretical passive reference portfolio or benchmark.

In active portfolio management, the aim is to maximize the relative return (often subject to a risk constraint). In passive portfolio management, the aim is to obtain a relative return as close to zero as possible, thereby reproducing the return of the theoretical reference portfolio. When the relative return is positive, the portfolio is said to outperform the benchmark. Conversely, when the relative return is negative, the portfolio is said to underperform the benchmark.

Within passive portfolio management, the absolute value of the relative return is often called the tracking error, which is confusing since the tracking error is more generally defined as the standard deviation of the relative return. Index funds are the financial products that use passively managed portfolios.

The relative return measure is a useful measure to evaluate the skill of the portfolio manager: if the relative return is positive, then the portfolio manager has skill. However, the relative return measure by itself is not sufficient to quantify how much skill a portfolio manager has, since the measure does not take into account the amount of risk that the portfolio manager has taken. In order to compare two outperforming portfolio managers, one should therefore consider not only the relative return, but also the risk taken by each portfolio manager.

Juxtaposed with the relative return measure is the absolute return measure, which is used to describe the return of the investment portfolio itself. In recent years, so-called absolute return strategies, that aim to always produce a positive absolute return regardless of the directions of financial market, have become popular. Contrary to popular opinion, it is not true that the relative return cannot be measured in a meaningful sense for absolute return strategies. After all, the neutral position of these portfolios is to be fully invested in cash without any other long or short positions. Thus, the risk-free rate is an appropriate benchmark to use for measuring the relative return of absolute return strategies.

See also

* Index fund
* enhanced indexing
* return

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Relative Return — The return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark. Relative returns are most often… …   Investment dictionary

  • Relative — can refer to: *Kinship, the principle binding the most basic social units society. If two people are connected by circumstances of birth, they are said to be relatives Physics*Relativity as a concept in physics (for example Albert Einstein s… …   Wikipedia

  • Return on capital — Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net operating profit less adjusted taxes divided by Invested …   Wikipedia

  • Return on equity — (ROE) measures the rate of return on the ownership interest (shareholders equity) of the common stock owners. It measures a firm s efficiency at generating profits from every unit of shareholders equity (also known as net assets or assets minus… …   Wikipedia

  • Relative value (economics) — Relative value is the attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another. The term is used in economics, business or investment. In …   Wikipedia

  • Return to Castle Wolfenstein — Infobox VG width = title = Return to Castle Wolfenstein caption = aspect ratio = resolution = developer = id Software Gray Matter Interactive Nerve Software publisher = Activision (Windows, Xbox) Aspyr Media, Inc. (Mac OS) Virgin Interactive… …   Wikipedia

  • Return loss — In telecommunications, return loss or reflection loss is the loss of signal power resulting from the reflection caused at a discontinuity in a transmission line or optical fiber. This discontinuity can be a mismatch with the terminating load or… …   Wikipedia

  • Return of the Saint — Infobox television show name = Return of the Saint caption = Reprint of an early Saint novel published as a tie in with the series format = Action adventure runtime = 60 min. creator = Leslie Charteris starring = Ian Ogilvy country = UK network …   Wikipedia

  • Relative Heroes — Supercbbox| title=Relative Heroes caption=Cover to Relative Heroes #1, art by Yvel Guichet. schedule=Monthly format=Limited series publisher=DC Comics date=March October 2000 issues=6 main char team=Houston Temper Allure Blindside Omni Chloe… …   Wikipedia

  • Return On Capital Gains — The return that one gets from an increase in the value of a capital asset (investment or real estate). The return on capital gain is the measure of the investment gain for an asset holder, relative to the cost at which an asset was purchased.… …   Investment dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”