What are average excess returns?
Updated by Justin Ling
The Sharpe Ratio score uses average excess returns to calculate your profit performance.
Total return displayed on your portfolio page calculates the total profit you have generated since the inception of your portfolio.
Read more about total return here.
Average return, used in Sharpe Ratio and found in your performance page is your average daily returns.
Each day we record your portfolio value, the change from the day before is recorded as that day's "daily return." The average of all your daily returns is your average daily return.
Day 1 Returns: -2%
Day 2 Returns: 5%
Day 3 Returns: 7%
Day 4 Returns: -5%
Day 5 Returns: 3%
Your average return for these 5 days would be = 2%.
Risk-Free Rate & Excess Returns
The risk-free rate of return is the theoretical rate of return of an investment with zero risk.
In practice, the interest rate on a three-month U.S. Treasury bill is used as a proxy for the risk-free rate.
The Return you generate on top of the Risk-free rate is known as "Excess returns."
In the Sharpe Ratio calculation, we subtract the average daily US Treasury bill's return from your average daily return. The result is your average daily excess return.