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Excess Returns

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Excess returns are generally defined as the returns provided by a given portfolio minus the returns provided by a risk-free asset. Excess returns are those in excess of the riskless asset. Excess returns are associated with the Capital Asset Pricing Model which postulates that riskier investments must offer higher returns to compensate investors for added risk. Excess returns can be negative if the returns an asset provides are less than the risk-free rate. Some investors don't distinguish between "excess returns" and "abnormal returns"; others claim the terms are different. These investors agree that excess returns measure the difference in the returns of a portfolio and a riskless asset. They argue, however, that abnormal returns differ from excess returns and measure the difference in returns between a portfolio and a market benchmark such as the S&P 500.



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