Absolute Return
Absolute return is the return that an asset achieves over a specified period. This measure looks at the appreciation or depreciation, expressed as a percentage, that an asset, such as a stock or a mutual fund, achieves over a given period.Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.
Definition: Absolute return refers to the return achieved by an asset over a specified period. This metric, expressed as a percentage, indicates the appreciation or depreciation of an asset (such as a stock or mutual fund) over the given period. Unlike relative return, absolute return focuses on the return of a specific asset without comparing it to other benchmarks or indices.
Origin: The concept of absolute return originated from traditional investment analysis methods. Early investors and financial analysts evaluated asset performance by calculating the returns over specific time periods. With the development of financial markets, absolute return has become an important metric for measuring investment performance.
Categories and Characteristics: Absolute return can be categorized as follows:
- Positive Absolute Return: The return of an asset is positive over the specified period, indicating appreciation.
- Negative Absolute Return: The return of an asset is negative over the specified period, indicating depreciation.
- Simple and Intuitive: It only focuses on the return of the asset itself without needing to compare it to other benchmarks.
- High Independence: It is not influenced by the overall market performance, making it suitable for evaluating the performance of individual assets.
Specific Cases:
- Case 1: Investor A purchased a stock for $100 on January 1, 2023. By December 31, 2023, the stock price had risen to $120. The absolute return is calculated as follows:
Absolute Return = ((120 - 100) / 100) * 100% = 20% - Case 2: Investor B purchased a mutual fund for $200 on January 1, 2023. By December 31, 2023, the fund price had fallen to $180. The absolute return is calculated as follows:
Absolute Return = ((180 - 200) / 200) * 100% = -10%
Common Questions:
- Does absolute return consider inflation? Absolute return does not consider inflation; it only reflects the nominal return of the asset over the specified period.
- What is the difference between absolute return and relative return? Absolute return focuses solely on the return of a single asset, while relative return compares the asset's return to market benchmarks or other assets.
