How to Calculate Excess Returns

Calculating excess returns involves calculating how much money you made on your specific investments beyond what you would have made if you invested in a risk-free investment such as a guaranteed government bond. Investors can follow a specific formula to figure out the the difference between an asset's return and the riskless rate of return.

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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.

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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.

Warning

Although investing in specific stocks instead of index funds offers you the opportunity to earn excess returns, specific stocks do not provide you with the same security as guaranteed, risk-free bonds. The potential benefits of excess returns come at considerable risk.

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