apologies if this is not the correct place for this type of question, but I just want to confirm if the following de-annualization is correct.

if a manager states that he will earn 200 bps of target excess returns over a year. How much daily target excess returns would be expected?

i believe that the de-annualization should be 200 ^ (1/252), but a colleague said that it should be 200 * 1/252. Which method is the most correct approach?

  • $\begingroup$ A very warm welcome to Quant.SE and thank you for your question. This community lives on feedback so if the answers provided here did help you please feel free to upvote and accept them - Thank you :-) $\endgroup$ – vonjd Feb 24 '15 at 8:32
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    $\begingroup$ apparently i need at least 15 reputation to do so... but i would upvote your response if i could! :) $\endgroup$ – Monduras Feb 24 '15 at 13:48

It is neither: Because returns are growth rates that have to be compounded and basis points are percentage points divided by $100$ you do the following:

$$10000\ (\sqrt[252]{\frac{200}{10000}+1}-1)\approx 0.7858\ bp$$

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  • $\begingroup$ thank you @vonjd how might this look in excel? also, is there an article i can read on the subject? we might have been going about de-annualizing the target excess returns ( portfolio - benchmark ) the wrong way $\endgroup$ – Monduras Feb 24 '15 at 13:40
  • $\begingroup$ figured out how to get it in excel! ty, my colleague's approach results in nearly the same figures off by a small margin. please let me know is there somewhere i can read that confirms your approach? $\endgroup$ – Monduras Feb 24 '15 at 14:04
  • $\begingroup$ @Monduras: See e.g. here: en.wikipedia.org/wiki/Rate_of_return#Annualisation - you have to take into account the def. of basis points though! If this did help you please accept my answer - thank you :-) $\endgroup$ – vonjd Feb 24 '15 at 14:29

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