How to Calculate Excess Returns

How to Calculate Excess Returns

Step 1

Collect information about the interest rate on guaranteed risk-free government bonds. Sites like Yahoo Finance offer clear, accessible information on the guaranteed rate of return on 10- or thirty-year U.S. Treasury bonds.

Step 2

Gather information about your stock portfolio over the same time period. This might involve either logging on to your Internet portfolio manager or contacting your broker. You want to know the value of your portfolio at the beginning of the time period and the value of your portfolio at the end of the time period.

Step 3

Calculate the percentage growth rate for your portfolio over the specified period of time. For example, if the value of your portfolio was 1,000 and now it is 1,500, your growth rate is (1,500/1,000) - 1 x 100 percent= 50 percent.

Step 4

Subtract the guaranteed rate of return on the risk-free bond from your stock portfolio's performance. For example, if the risk-free bond pays 7.33 percent and your portfolio grew by 8.33 percent, calculate 8.33 percent minus 7.33 percent.

Step 5

Identify your excess returns. In the case above, your excess return is 1 percent. This means that your portfolio payed you 1 percent more than you would have earned had you invested in a risk-free bond.