Active return quantifies the difference between the return of an investment portfolio and its benchmark. This measurement is vital for assessing the skill of portfolio managers in generating excess returns from active management.
Formula of Active Return Calculator
The formula for active return is straightforward but powerful:
Active Return = Portfolio Return – Benchmark Return
Detailed Breakdown of the Formula
- Calculate the Portfolio Return
- Portfolio Return = (Ending Portfolio Value – Beginning Portfolio Value + Dividends Received) / Beginning Portfolio Value
- Calculate the Benchmark Return
- Benchmark Return = (Ending Benchmark Value – Beginning Benchmark Value + Dividends Received from Benchmark) / Beginning Benchmark Value
- Compute the Active Return: Using the results from the above calculations, subtract the Benchmark Return from the Portfolio Return to find the Active Return.
Table for General Terms and Calculations
This table includes key terms related to calculating active return, providing definitions and example values where relevant. This is aimed at helping users understand the components that affect the active return calculation without needing to perform each calculation manually.
| Term | Definition | Example Values/Conversions |
|---|---|---|
| Portfolio Return | The return achieved by the portfolio over a specific period. | Calculated as: ((Ending Value – Beginning Value + Dividends) / Beginning Value) * 100% |
| Benchmark Return | The return of a benchmark index over the same period as the portfolio. | Calculated similarly to Portfolio Return |
| Ending Portfolio Value | The value of the portfolio at the end of the period. | $120,000 |
| Beginning Portfolio Value | The value of the portfolio at the start of the period. | $100,000 |
| Dividends Received | Income received from the assets within the portfolio during the period. | $2,000 |
| Ending Benchmark Value | The value of the benchmark index at the end of the period. | $115,000 |
| Beginning Benchmark Value | The value of the benchmark index at the start of the period. | $100,000 |
| Dividends Received from Benchmark | Income received from the benchmark assets during the period. | $1,500 |
| Active Return | The difference between the portfolio return and the benchmark return. | Calculated as: Portfolio Return – Benchmark Return |
Example of Active Return Calculator
Consider a portfolio that started the year at $100,000 and ended at $120,000 with $2,000 in dividends received, compared to a benchmark that started at $100,000 and ended at $115,000 with $1,500 in dividends. The calculation would proceed as follows:
- Portfolio Return: 22%
- Benchmark Return: 16.5%
- Active Return: 5.5%
This example demonstrates the calculator’s utility in revealing the effectiveness of the portfolio’s management strategy.
Most Common FAQs
A positive active return indicates that the portfolio has outperformed its benchmark, suggesting effective management and investment strategy.
Investors should use active return data to assess the value added by their investment managers and consider it in their strategy adjustments and performance evaluations.