Excess Returns


DEFINITION of 'Excess Returns'

Investment returns from a security or portfolio that exceed a benchmark or index with a similar level of risk. It is widely used as a measure of the value added by the portfolio or investment manager, or the manager's ability to "beat the market." Also known as alpha.

BREAKING DOWN 'Excess Returns'

For example, consider a large-cap U.S. mutual fund that has the same level of risk (i.e. beta = 1) as the S&P 500 index. If the fund generates a return of 12% in a year when the S&P 500 has only advanced 7%, the difference of 5% would be considered as excess return, or the alpha generated by the fund manager.

Critics of mutual funds and other actively-managed portfolios contend that it is next to impossible to generate excess returns on a consistent basis over the long-term, as a result of which, most fund managers underperform the benchmark index over time. This has led to the tremendous popularity of index funds and exchange-traded funds.

  1. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, ...
  3. Return

    The gain or loss of a security in a particular period. The return ...
  4. Information Ratio - IR

    A ratio of portfolio returns above the returns of a benchmark ...
  5. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  6. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
Related Articles
  1. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  2. Investing Basics

    A Statistical Look at Passive Vs. Active Management

    Find out what the data has to say about the passive management Vs. active management debate, and why there isn't necessarily a clear winner.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Russell 1000 Value

    Learn about the iShares Russell 1000 Value exchange-traded fund (ETF), which invests in value stocks that are included in the Russell 1000 Value index.
  6. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  7. Bonds & Fixed Income

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  8. Mutual Funds & ETFs

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  9. Options & Futures

    Bettering Your Portfolio With Alpha And Beta

    Increase your returns by creating the right balance of both these risk measures.
  10. Mutual Funds & ETFs

    Index Investing

    Get to know the most important market indices and the pros and cons of investing in them.
  1. How do you calculate the excess return of an ETF or indexed mutual fund?

    For exchange-traded funds (ETFs), the excess return should be equal to the risk-adjusted (or beta) measure that exceeds the ... Read Full Answer >>
  2. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  5. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  6. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center