Economics Risk And Return Questions Medium
The risk-adjusted return on investment is a measure that takes into account the level of risk associated with an investment in order to evaluate its performance. It is a way to assess whether the return achieved by an investment adequately compensates for the risk taken.
There are various methods to calculate the risk-adjusted return, but one commonly used approach is the Sharpe ratio. The Sharpe ratio compares the excess return of an investment (the return above the risk-free rate) to its volatility or standard deviation. A higher Sharpe ratio indicates a better risk-adjusted return, as it implies that the investment generated higher returns relative to its level of risk.
Another method to measure risk-adjusted return is the Treynor ratio, which also considers the excess return of an investment but divides it by the investment's beta. The beta measures the sensitivity of the investment's returns to the overall market movements. A higher Treynor ratio suggests a better risk-adjusted return, as it indicates that the investment generated higher returns per unit of systematic risk.
In summary, the risk-adjusted return on investment is a measure that evaluates the performance of an investment by considering the level of risk taken. It helps investors assess whether the returns achieved justify the risks involved and compare different investment options based on their risk-adjusted returns.