Other Major Return Measures and Their Applications

Gross and Net Return

A gross return is the return on assets managed less any trading expenses and commissions.

Gross return is intended to reflect the investment skill of the manager.

Net return is a measure of what the investment vehicle (e.g., mutual fund) has earned for the investor.

Net return accounts for (i.e., deducts) all managerial and administrative expenses that reduce an investor’s return.

Pre-Tax and After-Tax Nominal Return

Pre-tax nominal returns — that is, no adjustment has been made for taxes or inflation. In general, all returns are pre-tax nominal returns unless they are otherwise designated.

The after-tax nominal return is computed as the total return minus any allowance for taxes on dividends, interest, and realised gains.

Real Returns

Frequently, the real risk-free return and the risk premium are combined to arrive at the real “risky” rate and is simply referred to as the real return, or:

Leveraged Return

If the total investment return earned on the leverage portfolio, $R_P$, exceeds the borrowing cost on debt, $r_D$, taking on leverage increases the return on the portfolio. Denoting the return on a leveraged portfolio as $R_L$, then the return can be calculated as follows:

where $V_E$ is the equity of the portfolio and $V_B$ is the debt or borrowed funds. If $R_P<r_D$ then leverage decreases $R_L$.