Question

Discuss the different approaches to compute excess returns in relation to risk. How do they compare?

Answer 1

Different approaches to compute excess return

1. Use the benchmark index as the base and calculate the returns that your portfolio generated in excess to the benchmark index.

2. Use the industry average as the base and then calculate the outperformance or excess return your stock was able to given when compared to the industry.

3. If you are a mutual fund, then calculate the average return in the basket of mutual funds. Then calculate the excess return you mutual fund delivered over and above the category of mutual funds.

In conclusion, if you are able to beat the benchmark and category, then you will be considered a good stock picker.