Risk-Adjusted Return

AAA

DEFINITION of 'Risk-Adjusted Return'

A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios.

INVESTOPEDIA EXPLAINS 'Risk-Adjusted Return'

There are five principal risk measures: alpha, beta, r-squared, standard deviation and the Sharpe ratio. Each risk measure is unique in how it measures risk. When comparing two or more potential investments, an investor should always compare the same risk measures to each different investment in order to get a relative performance perspective.

RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. William F. Sharpe

    An American economist who won the 1990 Nobel Prize in Economics, ...
  3. Terminal Capitalization Rate

    A rate used to estimate the resale value of a property at the ...
  4. Modified Sharpe Ratio

    A ratio used to calculate the risk-adjusted performance of an ...
  5. Risk-Free Rate Of Return

    The theoretical rate of return of an investment with zero risk. ...
  6. Return

    The gain or loss of a security in a particular period. The return ...
RELATED FAQS
  1. What is a good Sharpe ratio?

    The Sharpe ratio is a well-known and well-reputed measure of risk-adjusted return on investment, developed by William Sharpe. ... Read Full Answer >>
  2. What mutual funds can be used for investing in the industrial sector?

    The industrial goods sector provides investors access to companies that engage in activities such as aerospace and defense, ... Read Full Answer >>
  3. What is the difference between a custodian bank and a mutual fund custodian?

    Custodian banks and mutual fund custodians, commonly known as mutual fund corporations, perform very similar roles for different ... Read Full Answer >>
  4. Who is the counterparty of a derivative?

    The counterparty to a derivative is the party who takes the other side of the trade. Every derivative trade needs to have ... Read Full Answer >>
  5. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
  6. How can derivatives be used for risk management?

    Derivatives could be used in risk management by hedging a position to protect against the risk of an adverse move in an asset. ... Read Full Answer >>
Related Articles
  1. Personal Finance

    A Career In Real Estate Portfolio Management

    Find out why this job more closely resembles the role of a CEO than an asset manager.
  2. Investing Basics

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  3. Mutual Funds & ETFs

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  4. Mutual Funds & ETFs

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  5. Active Trading

    When Geographic Diversification Fails

    Geographic diversification is becoming an ineffective investing strategy, but there are others that pay off in the long term.
  6. Mutual Funds & ETFs

    Floating-Rate Mutual Funds: Rewards And Risks

    In an economy with low interest rates, investors need to get creative in order to reap high returns.
  7. Options & Futures

    Calculating The Equity Risk Premium

    See the model in action with real data and evaluate whether its assumptions are valid.
  8. Fundamental Analysis

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  9. Trading Strategies

    The Pros & Cons Of Being A Trader On The West Coast

    There are certain benefits and drawbacks that go with being a trader on the West Coast of North America.
  10. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify Your Portfolio

    Seeking low cost diversification to high quality stocks and bonds? Consider these 4 ETFs.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center