Economics Risk And Return Questions Medium
The risk-adjusted return on capital is calculated by dividing the excess return of an investment by its risk. It is a measure that takes into account the level of risk associated with an investment and compares it to the potential return. The formula for calculating the risk-adjusted return on capital is as follows:
Risk-Adjusted Return on Capital = (Return on Investment - Risk-Free Rate) / Risk
In this formula, the return on investment refers to the actual return earned from the investment, the risk-free rate represents the return that could be earned from a risk-free investment such as a government bond, and the risk is a measure of the investment's volatility or uncertainty.
By using this formula, investors can assess the risk-adjusted return on capital to determine whether the potential return justifies the level of risk involved. A higher risk-adjusted return indicates that the investment is providing a greater return relative to its risk, while a lower risk-adjusted return suggests that the investment may not be worth the level of risk involved.