Lesson 8 of 8 · 14 min

Gross, net, after-tax, real and leveraged returns

Peel a headline return down to what the investor keeps after fees, taxes and inflation, and remember that leverage magnifies whatever is left, both up and down.

In short

  • Gross return: after trading costs, before management and administrative expenses; it reflects manager skill.
  • Net return: gross minus management and administrative expenses; what the fund earned for the investor.
  • Returns are pre-tax nominal unless stated. After-tax returns deduct taxes on income and realised gains; taxable investors judge managers on them.
  • Real return: (1+nominal)/(1+inflation)−1(1+\text{nominal})/(1+\text{inflation}) - 1. After-tax real return: tax first, then inflation.
  • Leveraged return RL=RP+VBVE(RP−rD)R_L = R_P + \frac{V_B}{V_E}(R_P - r_D): borrowing helps only if RP>rDR_P > r_D; futures margin multiplies returns both ways.

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Gross, net, after-tax, real and leveraged returns · Rates and Returns