Enter the investment return and the risk-free rate into the calculator to determine the excess return. This calculator helps to evaluate the performance of an investment relative to a risk-free asset.
Excess Return Formula
The following formula is used to calculate the excess return:
ER = IR - RFR
Variables:
- ER is the excess return (%)
- IR is the investment return (%)
- RFR is the risk-free rate (%)
To calculate the excess return, subtract the risk-free rate from the investment return.
What is Excess Return?
Excess return is the difference between the return of an investment and the return of a risk-free benchmark, such as a government treasury bond. It represents the additional gain (or loss) that an investor receives (or incurs) from taking on the additional risk compared to a risk-free investment. Excess return is a common measure used in finance to assess the performance of investment portfolios and individual securities.
How to Calculate Excess Return?
The following steps outline how to calculate the Excess Return.
- First, determine the investment return (IR) as a percentage.
- Next, determine the risk-free rate (RFR) as a percentage.
- Use the formula from above = ER = IR – RFR.
- Finally, calculate the Excess Return (ER) as a percentage.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Investment return (IR) = 8%
Risk-free rate (RFR) = 2%
