Risk-adjusted return is a measurement of a potential investment's potential profit taking into account its associated risk. It is used to evaluate individual stocks, investment funds, and entire portfolios.
What is Risk-adjusted return?
Risk-adjusted return is a calculation of the profit or potential profit from an investment that takes into account the risk associated with that investment.
What does it mean to adjust for risk?
Adjusting for risk means taking into account any potential losses that could occur due to the investment and using that information to calculate the expected return from the investment.
How do you calculate Risk-adjusted return?
Risk-adjusted return is calculated by taking the expected return from an investment and subtracting the risk associated with the investment. The formula can be expressed as: Risk-adjusted return = Expected return – Risk.
Key Points
Risk-adjusted return is a ratio
Risk-adjusted return is often presented as a ratio that measures the expected return of a stock in comparison to the risk taken on when investing in it.
Manage market volatility
Risk-adjusted return can help investors understand and manage market volatility, allowing them to make better decisions about their investments and increase long-term performance.
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