Economics Risk And Return Questions Medium
The risk-adjusted return on equity is calculated by dividing the excess return on equity by the equity risk premium.
To calculate the excess return on equity, subtract the risk-free rate of return from the actual return on equity. The risk-free rate of return is typically the return on a risk-free investment such as government bonds.
The equity risk premium is the additional return that investors expect to receive for taking on the risk of investing in equities instead of risk-free investments. It represents the compensation for the higher risk associated with equity investments.
Once you have calculated the excess return on equity and the equity risk premium, divide the excess return on equity by the equity risk premium to obtain the risk-adjusted return on equity.
Mathematically, the formula for calculating the risk-adjusted return on equity is as follows:
Risk-Adjusted Return on Equity = (Actual Return on Equity - Risk-Free Rate of Return) / Equity Risk Premium