Absolute Percentage Growth
Absolute Percentage Growth: is the positive change in the value of an asset expressed as a percentage of the initial value.
Absolute Percentage Growth Details
Absolute percentage growth is a positive change in the value of an asset. The change has to be positive for it to be qualified as growth. Absolute percentage growth is growth that is not relative to a benchmark or another reference.
In the stock market, growth or performance is compared to a benchmark. In the case of absolute percentage growth, the change is expressed as a percentage of the initial amount invested and not compared to other stocks or other investments in the same category.
When the term “absolute” is used, people are quick to assume that it refers to the change in the value of an asset in terms of dollars or other currency. Although the change is absolute, it is expressed as a percentage. For example, if a company's stock price increases from $200 to $220, the absolute increase in the stock price is $20, but the absolute percentage increase in the stock price is 10%.
In the stock market and the investment industry in general, performance is measured against other stocks in the same category. This comparison leads to a benchmark that is used to measure if a portfolio has underperformed or overperformed.
Investopedia.com gives a perfect example: “a small-cap U.S. mutual fund may be up 30% in a given year, which by any yardstick is a good return in absolute terms. But if the small-cap index that it tracks (such as the Russell 2000 index) is up 35%, the fund is considered to have lagged its benchmark by five percentage points.” So the 30% increase in the value of the mutual fund is the absolute percentage growth, which is impressive.
Institutional investors are more interested in relative performance or relative returns on investment than retail investors. The primary reason for this is that institutional investors are concerned with overall performance in the market and the returns the institutional investors would have earned if they invested in the best portfolio.
On the other hand, retail investors are not interested in the overall performance of the market and will not care if it did well or not, as long as they make absolute returns. So retail investors are concerned about absolute percentage growth. For example, suppose a portfolio makes returns of 28%, while the market benchmark for such a portfolio is 32%. In that case, the retail investors will consider their investment to have performed well. In contrast, the institutional investors will consider the portfolio as underperformed since its performance is less than the benchmark.
Example of Absolute Percentage Growth
Let’s use an example to illustrate the absolute percentage growth.
Mr. Falo is a retail investor who has created an investment portfolio that includes bonds, real estate, gold, and stock. He invested $500,000 that is spread across the entire portfolio. At the end of three years, Mr. Falo has realized that the combined value of his portfolio is $610,000. What is the absolute percentage growth of Mr. Falo’s portfolio?
To calculate the absolute percentage growth, you have to calculate the absolute change in the asset's value and then convert the absolute change to a percentage of the initial value. The absolute change in the value of an asset is given by:
Absolute Change = Initial Value – Current Value
The absolute percentage change is given by:
(Absolute Change / Initial Value ) * 100%
Let’s calculate the absolute change in the value of Mr. Falo’s portfolio. The initial value is $500,000 while the current value is $610,000. It means that absolute change is
Absolute change = $500,000 - $610,000
The absolute percentage growth will now be:
Absolute percentage growth = ( $110,000 / $500,000 ) * 100%
So the absolute percentage growth of Mr. Falo’s investment portfolio is 22%.
Absolute Percentage Growth vs. Percentage Point Growth
Absolute percentage growth refers to the change in the value of an asset expressed as a percentage of the initial value. The absolute percentage growth is obtained by subtracting the initial value from the current value and dividing the difference by the initial value. The result is then multiplied by 100%. The percentage point is the increase from one percentage to another.
For example, suppose the performance of an investment portfolio is 8% after two years, and the performance has increased to 12% at the end of three years. In that case, we say that the performance of the investment portfolio has increased by four percentage points from 8% to 12%.
So absolute percentage growth shows the growth of an asset expressed as a percentage of the initial value, while percentage point growth increases in percentage from one percentage to another.