Economics Risk And Return Questions Medium
The risk-adjusted return on capital is a measure used to assess the profitability of an investment or business project while taking into consideration the level of risk involved. It is a way to evaluate the return on investment in relation to the amount of risk taken.
To calculate the risk-adjusted return on capital, one commonly used method is to subtract the risk-free rate of return from the actual return on investment, and then divide it by the standard deviation of the investment's returns. The risk-free rate represents the return an investor would expect from a risk-free investment, such as a government bond.
By incorporating the standard deviation, which measures the volatility or variability of returns, the risk-adjusted return on capital provides a more comprehensive assessment of the investment's performance. It helps investors and decision-makers compare different investment opportunities and determine whether the potential return justifies the level of risk involved.
In summary, the risk-adjusted return on capital is a measure that considers both the return on investment and the level of risk taken. It provides a more accurate evaluation of an investment's profitability by factoring in the volatility of returns.