Relative returns

A relative return, in contrast to an absolute return, measures how well an investment has performed compared to some other potential investment. It is usual to compare portfolios to market or sector indices.

Suppose a portfolio makes a gain of 10% over an year, but the market the portfolio is invested in makes a gain of 5%. The absolute return is 10%, but the market relative return is:

(1 + 10%) ÷(1+ 5%) ≈10% - 5% = 5%

The benchmark against which the relative gain is compared will vary. Sometimes more than one relative gain number may be useful. The performance of a share may be compared to a national market, or to its sector, or to its sub-sector.

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