Risk Adjusted Return

What is Risk-Adjusted Return?

Risk-adjusted return shows how much profit an investment generates relative to the risk taken. It helps investors compare different options fairly by factoring in both returns and risks. A higher risk-adjusted return means better rewards for the level of risk. This metric is useful for making smarter investment choices.

Key Features of Risk-Adjusted Return

• Analyzing profitability in perspective of risk enables one to grasp the whole performance of an investment.

• It allows investors to evaluate investments impartially based on returns in relation to varying degrees of risk.

• Along with other kinds of assets, it covers stocks, bonds, mutual funds.

Common Metrics for Risk-Adjusted Returns

• Sharpe Ratio: Measures the additional profit an investment generates per unit of total risk, using standard deviation as the measure.

• Sortino Ratio: Measures returns considering only downside risk, showing how much extra return is earned per unit of negative volatility.

• Treynor Ratio: Measures returns relative to market risk (beta), assessing how efficiently an investment performs compared to market fluctuations.