What is 'Active Return'
Active return is the percentage gain or loss of an investment relative to the investment's benchmark. An active return is the difference between the benchmark and the actual return. It can be positive or negative and is typically used to assess performance.
BREAKING DOWN 'Active Return'
A portfolio that outperforms the market has a positive active return, assuming that the market as a whole is the benchmark. For example, if the benchmark return is 5% and the actual return is 8%, the active return would then be 8% - 5% = 3%.
If the same portfolio returned only 4%, it would have a negative active (4% - 5% = -1%).
If the benchmark is a specific segment of the market, the same portfolio could hypothetically underperform the market and still have an active return relative to the chosen benchmark. This is why it is important for investors to know which benchmarks are being used and why.