Residual return

Residual Return
Return independent of the benchmark. The residual return is the return relative to beta times the benchmark return. To be exact, an asset's residual return equals its excess return minus beta times the benchmark excess return.

Residual return plus benchmark timing return. For a given asset with beta equal to one, if its residual return is 2%, and the benchmark portfolio exceeds its consensus expected returns by 1%, then the asset's exceptional return is 3%.

The residual return is:
(R - r) × B
Where:
B is the NAV
R is the return based on accounting profits and owners equity (net profit ÷ B), and
r is the required rate of return on equity.

Exceptional Return Residual return plus benchmark timing return. For a given asset with beta equal to one, if its residual return is 2%, and the benchmark portfolio exceeds its consensus expected returns by 1%, ...

Information Ratio The ratio of annualized expected residual return to residual risk. A central measurement for active management, value added is proportional to the square of the information ratio.

Return independent of the benchmark. The residual return is the return relative to beta times the benchmark return. To be exact, an asset's residual return equals its excess return minus beta times the benchmark excess return.
Residual risk ...

The approach is also self-checking, in that the size of the residual returns should be very low.

See also: Expense, Banks, Fraud, Margin account, Stock symbol