Active Returns

The active returns mean the value addition on an actively-managed portfolio and are the difference between the returns on the portfolio and the returns on the benchmark portfolio.

RA = Rp – Rb

Where RA is the active returns, Rp is the returns on the portfolio, Rb is the returns on the benchmark.

Rp = Rf + Alpha + Beta X (Rm – Rf)

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The active returns can either be positive or negative. It is basically the result of Active Management funds. The returns depend on the decision and analysis of the portfolio managers. Usually, these returns are higher than the market returns.

Example of active return

If the benchmark return is 7% and the actual return is 10%, the active return would then be 3% (10% – 7% = 3%).

If the same portfolio returned only 5%, it would have a negative active return of -2% (5% – 7% = -2%).

Active returns formula
Source: Tavaga Research