Economics Risk And Return Questions Medium
The risk-adjusted return on sales is calculated by dividing the net profit after taxes by the total sales revenue, and then adjusting it for the level of risk associated with the business or investment. This can be done using various risk measures such as the standard deviation of returns, beta coefficient, or other risk indicators.
One commonly used method to calculate the risk-adjusted return on sales is by using the formula:
Risk-Adjusted Return on Sales = (Net Profit after Taxes / Total Sales Revenue) x (1 - Risk Premium)
The risk premium represents the additional return required by investors to compensate for the level of risk involved. It is typically determined based on the risk-free rate of return and the risk associated with the specific investment or business.
By incorporating the risk premium into the calculation, the risk-adjusted return on sales provides a more accurate measure of the profitability of a business or investment, taking into account the level of risk involved. This allows investors and managers to compare different opportunities and make informed decisions based on the risk-return tradeoff.