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Begin with matched periods
Suppose a fictional portfolio earns 10% and a benchmark 5% over the same year. The return difference is 5 percentage points. Both percentages are measured against their own initial wealth, and the comparison should use compatible income and cost treatment.
Compute the relative growth factor
Starting each at index 100, endpoints are 110 and 105. Portfolio wealth divided by benchmark wealth grows to 110/105, approximately 1.047619. Relative growth is therefore 4.761905%, rather than 5%.
| Question | Calculation | Result |
|---|---|---|
| How many percentage points more? | 10% − 5% | 5 percentage points |
| How much greater relative wealth? | 1.10 / 1.05 − 1 | 4.761905% |
Keep multi-period linking coherent
For several periods, compare the complete linked portfolio factor with the complete linked benchmark factor. Adding periodic percentage-point differences does not generally reproduce the final wealth ratio. Dates and return definitions must remain aligned across the comparison.
Do not infer skill from one arithmetic comparison
Benchmark suitability, exposure, risk, costs and the observed sample all matter when interpreting a result. The ratio provides a defined relative-wealth statement. It does not establish that a chosen benchmark is appropriate or that the outperformance is statistically persuasive.