Active Returns

Posted in Finance, Accounting and Economics Terms, Total Reads: 456
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Definition: Active Returns

In finance, any sort of return can be classified or divided into 2 parts –

• The return owing to active decisions taken by the management and the decisions made by the portfolio manager.

• Return that is simply a function or outcome of the movement of the market.

 

 

A portfolio might show higher returns but care would need to be then taken, if it is actually because of the general market movement or a significant effort of the management that has gone behind this.


The return because of the movements in the market can be called benchmark return, say BR.

Active Return (AR) = Net Return (NR) – Benchmark Return (BR)


Benchmark returns are typically taken from index funds such as Nifty 50, Sensex 30 etc.


As one can observe, AR can be positive or negative. A positive active return would imply good results as highlighted by the efforts of the management and a negative active return would generally mean poor efforts in decision making.

 

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