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Risk-Adjusted Return

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Risk-Adjusted Return

Risk-adjusted return is a measure of the return of an investment compared to its risk. It is calculated by dividing the return of an investment by the risk taken to generate that return. The higher the risk-adjusted return, the better the investment is considered to be. Risk-adjusted return is a useful tool for investors to compare different investments and decide which one is the best for their portfolio.

History of Risk-Adjusted Return

The concept of risk-adjusted return was first introduced in the 1950s by Harry Markowitz, a Nobel Prize-winning economist. Markowitz developed the concept of modern portfolio theory, which states that investors should diversify their investments to reduce risk and maximize returns. Risk-adjusted return is a key component of modern portfolio theory, as it allows investors to compare different investments and decide which one is the best for their portfolio.

Risk-Adjusted Return Table

Investment Return Risk Risk-Adjusted Return
Stock A 10% High 5%
Stock B 8% Low 8%

In the above example, Stock A has a higher return than Stock B, but it also has a higher risk. When the risk is taken into account, Stock B has a higher risk-adjusted return than Stock A.

Summary

Risk-adjusted return is a measure of the return of an investment compared to its risk. It is calculated by dividing the return of an investment by the risk taken to generate that return. The higher the risk-adjusted return, the better the investment is considered to be. Risk-adjusted return is a useful tool for investors to compare different investments and decide which one is the best for their portfolio. For more information about risk-adjusted return, you can visit websites such as Investopedia, The Balance, and Morningstar.

See Also

  • Modern Portfolio Theory
  • Sharpe Ratio
  • Alpha
  • Beta
  • Standard Deviation
  • Treynor Ratio
  • Jensen’s Alpha
  • Value at Risk
  • Expected Return
  • Portfolio Optimization

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