Economics Risk And Return Questions Medium
The risk-adjusted return on equity is a measure that takes into account the level of risk associated with an investment or business venture in relation to the return it generates. It is used to assess the profitability and efficiency of an investment by considering the amount of risk taken to achieve the return on equity.
To calculate the risk-adjusted return on equity, one commonly used method is the Sharpe ratio. The Sharpe ratio is calculated by subtracting the risk-free rate of return from the investment's return, and then dividing the result by the investment's standard deviation. The risk-free rate of return is typically the return on a risk-free asset, such as a government bond.
A higher risk-adjusted return on equity indicates that the investment or business venture has generated a higher return relative to the level of risk taken. This implies that the investment has been more efficient in generating returns compared to other investments with similar levels of risk.
Investors and analysts use the risk-adjusted return on equity to compare different investment opportunities and assess their risk-return trade-off. It helps them make informed decisions by considering both the potential return and the associated risk of an investment.