Absolute Percentage Growth
What Is Absolute Percentage Growth?
Absolute percentage growth is an increase in the value of an asset or account communicated in percentage terms. Absolute percentage growth suggests that the increase in value is shown on a standalone basis, and not corresponding to a benchmark or one more asset on a relative basis.
Additionally alluded to as the absolute return, absolute percentage growth hence measures the gains or losses independent of any benchmark or other standard.
Seeing Absolute Percentage Growth Explained
In the investment industry, performance is generally measured on a relative basis, as opposed to in absolute terms. For instance, a small-cap U.S. mutual fund might be up 30% in a given year, which by any measuring stick is a decent return in absolute terms. Yet, on the off chance that the small-cap index that it tracks (like the Russell 2000 index) is up 35%, the fund is considered to have lagged its benchmark by five percentage points. The fund would likewise be measured against different funds in its category to judge whether it has outperformed or failed to meet expectations its companions.
The term "absolute percentage growth" can create some turmoil since "absolute" in some cases alludes to the total increase or diminishing in asset value in dollar terms, while "percentage" alludes to the relative change (increase or lessening) throughout some undefined time frame. Subsequently, if stock X increases in price from $10 to $15, the absolute increase is $5, while the percentage increase is half. The term may, consequently, be all the more precisely alluded to as absolute growth (or absolute return) in percentage terms.
Special Considerations
While institutional investors center around relative returns, retail investors are normally more worried about absolute returns. While setting out investment objectives, a retail investor might determine to the advisor that the target return for a portfolio ought to be, say, 5% or 7%; the average investor is typically far-fetched to demand that the portfolio ought to outperform a chose benchmark by x percentage points throughout some stretch of time.
The retail investor's performance center around absolute growth in a portfolio, as opposed to relative growth, can be an issue in savage bear markets, especially on the off chance that the investor is decently risk-averse. Assuming such an investor's equity portfolio is down 10% in a year when the benchmark index has declined 20%, the way that the portfolio has really outperformed the benchmark by 10 percentage points is probably going to offer meager comfort to the investor.
Absolute Return versus Relative Return Example
One method for seeing absolute return versus relative return is with regards to a market cycle, for example, bull versus bear. In a bull market, 2% would be viewed as a horrendous return. In any case, in a bear market, when numerous investors could be down as much as 20%, just saving capital would be viewed as a victory. In that case, a 2% return doesn't look so terrible. The value of the return changes in light of the unique situation.
In this scenario, the 2% would be the absolute return. Relative return is the justification for why a 2% return is terrible in a bull market and great in a bear market. What makes a difference in this setting isn't the amount of the return itself, yet rather what the return is relative to.
Features
- Absolute percentage growth measures the change in an investment's or alternately portfolio's value over a period without reference to some benchmark or outer measuring stick of performance.
- It is a percentage measure of absolute return, which can be either positive or negative in nature.
- While investors might measure their absolute percentage growth year-on-year, most investment managers lean toward relative measures of return performance.
