Economics Risk And Return Questions Medium
The risk-adjusted performance measure is a metric used to evaluate the performance of an investment or portfolio by taking into account the level of risk involved. It helps investors assess whether the returns generated by an investment are commensurate with the amount of risk taken.
One commonly used risk-adjusted performance measure is the Sharpe ratio. The Sharpe ratio calculates the excess return of an investment or portfolio over the risk-free rate (such as the return on government bonds) per unit of risk. It considers both the return and the volatility of the investment, providing a measure of how well an investment has performed relative to the amount of risk taken.
Another risk-adjusted performance measure is the Treynor ratio, which also considers the excess return of an investment or portfolio over the risk-free rate, but divides it by the investment's beta. The beta measures the sensitivity of the investment's returns to the overall market movements. The Treynor ratio helps investors assess the risk-adjusted performance of an investment relative to its systematic risk.
Other risk-adjusted performance measures include the Jensen's alpha, which measures the excess return of an investment or portfolio over its expected return based on a specific risk model, and the Sortino ratio, which focuses on the downside risk by considering only the volatility of negative returns.
Overall, risk-adjusted performance measures provide a more comprehensive evaluation of an investment's performance by considering the level of risk taken to achieve those returns. They help investors make informed decisions by comparing different investments or portfolios on a risk-adjusted basis.