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What is a Crossover Rate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 October 2014
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    Conjecture Corporation
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Crossover rates have to do with the amount of earnings that are generated by two different but similar projects. The crossover rate is the point at which the two projects achieve the same net present value. In terms of investments, calculating a crossover rate between two similar securities can help an investor determine what to buy and what to sell.

It is important to note that the crossover rate serves as an indicator of the relative performance of two different securities. This does not necessarily mean that the two securities in question are performing in a similar manner. It is very possible that the two different but similar securities carry a different rate of volatility.

Because the two securities under comparison may carry different levels of risk and movement, the crossover rate becomes a helpful method of making a decision to hold on to both securities or to sell off one of the two. Depending on the goals of the investor, he or she may choose to retain the security with the higher volatility for a little longer, but sell off the lower risk security and reinvest in the riskier option, at least for the short term. A more conservative investor may see the crossover risk as pointing toward retaining the lower risk security and selling off the one with the higher volatility before there is a chance for the stock to begin to drop.

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A crossover rate can be calculated at any point in time. Investors may chose to compare the returns on two different securities at the end of each calendar month, the close of the year, or even at the end of a trading day. Using the current level of return and projecting at what point the two securities can reasonably be anticipated to achieve the same rate of return can help the investor to make decisions that could impact the overall worth of the portfolio in both the short term and the long term.

While the crossover rate is helpful in making investment decisions, it is only one of many formulas and strategies that investors and brokers may take under consideration. Part of this is due to the very nature of the crossover rate projection. The assumption is that a given set of present circumstances will remain constant, or that only specific changes that are accounted for in the projection will come to pass. Since the projection of the crossover rate is not entirely certain until the action point of crossover is achieved, there is still a chance that unforeseen factors will influence the outcome. For this reason, investors will make use of a number of different forecasting methods to determine the best moves to make with various investments.

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