Excess Return

A return that is larger than some benchmark, especially the risk-free return. A portfolio, for example, may have an excess return above the index on which it is based. This occurs when the portfolio manager makes certain investment decisions that pay off for the investor. It is important to note that receiving an excess return almost always requires one to take on more risk.

excess return

The return on an asset or a portfolio in excess of the risk-free return. If short-term corporate debt provides a return of 4 ¹/₂ % while U.S. Treasury bills are yielding 3 ¹/₂ %, excess return on the corporate debt is 1%. Excess return is usually correlated with the riskiness of an investment.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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