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What is a Stock?

How to Choose a Stock

Active Trading vs Portfolio Management

How to start testing multiple strategies

What is an ETF?

How to Choose ETFs

What is short selling?

What is a Bond?

What is an Option?

Diversification Score

What is Portfolio Management Strategy?

What is Diversification?

What is the Diversification Score?

How to Build a Basic ETF Portfolio

What are asset-classes?

What is Industry Exposure?

What is Geopolitical Exposure?

How to read impact on diversification

Sharpe Ratio

What is Volatility?

What is Return?

What is Sharpe Ratio?

How to Improve Sharpe Ratio

How do I measure risk?

What are average excess returns?

What is a good Sharpe Ratio?

Challenge Metrics

Innovating Recruitment

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Designing a stand-out resume

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STAR Structure for Behavioural Interview Questions

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2022 Financial Markets Campus Recruitment Insights

Case Study: 2019 Credit-Suisse Results

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- What are average excess returns?

# What are average excess returns?

Updated by Justin Ling

The Sharpe Ratio score uses average excess returns to calculate your profit performance.

## Total Returns

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 Returns

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.

Example:

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.