Absolute return is simply the return on a particular asset, portfolio or investment. The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset – usually a stock or a mutual fund – achieves over a given period of time.
Relative return is the difference between the absolute return and a market, index or alternative investment. The return that an asset achieves over a period of time compared to a benchmark.
Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.
Why is it important to distinguish between absolute and relative returns? The answer is that investments do not exist in a vacuum; a return on investment means nothing if it is not compared to an alternative. For example, a mutual fund manager may promise a 10% absolute return, but if the S&P 500 appreciates at rate of 15%, then that fund manager is not so hot. You could just as easily (and for less expense) invest in a passive S&P 500 tracking stock that mimics the S&P 500 stock index and outperform the mutual fund by 5%.
Relative return provides a context for a promise by any money manager. Sure it is great for a portfolio to return a high percentage, but what is the greater market achieving? It is only worthwhile to put your money in the hands of a manager who can achieve a greater return than the market, otherwise what are you paying him for?!