The Excess Return Calculator helps investors measure how much additional return a portfolio or investment generated compared to a risk-free benchmark. This excess return is a critical performance indicator in finance, particularly when assessing the value added by an investment strategy or portfolio manager.
In simple terms, excess return shows how well an investment has performed above a baseline, like U.S. Treasury bonds, which are considered virtually risk-free. This helps investors understand if the additional risk they took was worth it and compare the performance of different investments or funds on a consistent basis.
Formula of Excess Return Calculator
Excess Return = Portfolio Return − Risk-Free Rate
Where:
Portfolio Return = (Ending Value − Beginning Value + Income) / Beginning Value
Risk-Free Rate = Return of a riskless investment (often a short-term government bond yield)
So, the full expanded formula becomes:
Excess Return = [(Ending Value − Beginning Value + Income) / Beginning Value] − Risk-Free Rate
This calculation can be used over any period (monthly, yearly, or multi-year) as long as the risk-free rate matches the same period.
Common Excess Return Scenarios Table
The following table includes sample portfolio performance data, common U.S. Treasury rates, and calculated excess returns. It serves as a quick reference guide.
| Beginning Value ($) | Ending Value ($) | Income ($) | Portfolio Return (%) | Risk-Free Rate (%) | Excess Return (%) |
|---|---|---|---|---|---|
| 10,000 | 11,000 | 200 | 12.00 | 2.00 | 10.00 |
| 25,000 | 27,000 | 0 | 8.00 | 1.50 | 6.50 |
| 15,000 | 15,300 | 300 | 4.00 | 0.50 | 3.50 |
| 8,000 | 9,000 | 50 | 13.13 | 3.00 | 10.13 |
| 20,000 | 20,500 | 100 | 3.00 | 1.00 | 2.00 |
This table helps users quickly estimate whether an investment has outperformed a benchmark and by how much, which is vital for portfolio review and fund comparison.
Example of Excess Return Calculator
Let’s calculate the excess return on a simple investment:
- Beginning Value = $10,000
- Ending Value = $11,000
- Income (like dividends) = $200
- Risk-Free Rate = 2.00%
First, find the portfolio return:
Portfolio Return = (11,000 − 10,000 + 200) / 10,000 = 1,200 / 10,000 = 0.12 or 12%
Then, calculate excess return:
Excess Return = 12% − 2% = 10%
This means the portfolio beat the risk-free rate by 10 percentage points, showing strong outperformance over the same period.
Most Common FAQs
This tool belongs to the investment performance and risk analysis calculators category. It is widely used in financial planning, portfolio management, and fund comparison.
It shows how much more an investment earned compared to a risk-free alternative. This helps investors assess whether their strategy is effective and worth the risk taken.
Yes. A negative excess return means the investment performed worse than the risk-free benchmark. This could suggest poor asset selection or an unfavorable market environment.