The two kinds of returns that investors most frequently use are absolute and relative returns. Absolute return tells you how much your investment has grown in percentage terms. Relative return tells you how this growth compares to a benchmark. The selection of an appropriate benchmark is critical, as comparing your performance against the wrong yardstick could give highly misleading results.
Relative Return Formula
Star by calculating your absolute percentage return, which equals: (sales proceeds-original investment)/original investment100. Say, you invested $500 at the beginning of the year, which has grown to $540 in 12 months. Your absolute return equals ($540-$500)/$500100, or 8 percent. To arrive at your relative return subtract the percentage gain or loss of the benchmark which you set out to beat. Say your benchmark is the S&P500 index, and the S&P advanced by 6 percent during the same period. Your relative return equals 8-6 percent, for a 2 percent return. So your excess return relative to the index is 2 percent.
- Photo Credit MicroWorks/iStock/Getty Images
How to Calculate Return on Assets
Return on assets is a measure of a company's profitability. In investing, the return on assets ratio provides a snapshot of how...
How to Calculate Relative Error
Relative error is a number that compares how incorrect a quantity is from a number considered to be true. Unlike absolute error,...
How to Find Relative Minimum
A relative minimum is the lowest point on a particular section of graph. This is in contrast to an absolute minimum, which...
How to Calculate Percent of Return
A percent of return is a term used to describe a return relative to the original amount. Percent of return is most...