Absolute returns refer to the actual gains or losses generated by an investment over a specified period, regardless of the performance of a benchmark or index. It is a measure of an investment’s success in achieving positive returns, without comparing it to external factors or market averages. Absolute returns focus on the raw profitability of an investment, providing a clear picture of its performance.
Investors often gauge the success of their investments by comparing them to market benchmarks such as the S&P 500 or a relevant index. While relative performance is important, absolute returns offer a complementary perspective. Here’s a deeper dive into absolute returns
Independent Evaluation: Absolute returns are independent of market conditions. They assess an investment’s performance on its own merits, making them valuable for evaluating strategies like hedge funds and alternative investments.
Risk Management: By focusing on the actual returns achieved, investors can better assess the risk associated with an investment. High volatility and inconsistent returns can be indicators of higher risk.
Diverse Application: Absolute returns can be applied to various asset classes, including stocks, bonds, real estate, and more. Investors can use them to evaluate individual investments or a portfolio as a whole.
Calculating Absolute Returns
The calculation of absolute returns is straightforward. It involves subtracting the initial investment amount from the final investment value and then dividing it by the initial investment amount. The formula is as follows
The formula for calculating absolute returns is as follows:
Absolute return = ((Selling price – Purchase price) / Purchase price) * 100
For example, if an investor initially invests ₹10,000 and the investment grows to ₹12,000, the absolute return is
Absolute Returns= (( ₹12,000 − ₹10,000) / ₹10,000) * 100 = 20%
This indicates a 20% Absolute Return on the investment.
Why are absolute returns important?
How do absolute returns differ from relative returns?
Can an investment have positive absolute returns but negative relative returns?
Are absolute returns suitable for all types of investments?
Investors should consider both relative and absolute returns when evaluating their portfolios to make informed decisions and manage their financial goals effectively.