What does risk adjusted return mean?

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What does risk adjusted return mean?

Category: Tags: asked June 22, 2012

8 Answers

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A measure of how much an investment returned in relation to the amount of risk it took on. Often used to compare a high-risk, potentially high-return investment with a low-risk, lower-return investment.

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from investopedia.comA 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 ReturnThere 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

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Risk adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers Trust, principal designer Dan Borge currently a Director at the expert firm LECG-SMART, in the late 1970s. Note, however, that more and more Return on risk Adjusted Capital (RORAC) is used as a measure, whereby the risk adjustment of Capital is based on the capital adequacy guidelines as outlined by the Basel Committee, currently Basel II.

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It is a measure which shows how well an investment performed in comparison to the level of risk taken.

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The return on an asset or investment relative to the return on assets and investments with similar risk. It gauges how much an investment returned in relation to the risk that was assumed to attain it.The calculation is important as it guides an investor in knowing whether he/she is getting the highest possible return for the least possible risk. It discloses whether the returns of the portfolio reflect smart investment decisions, or the taking on of extra risk that may or may not have been worth what was gained.

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The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy, named after William Forsyth Sharpe. ...en.wikipedia.org/wiki/Risk_adjusted_return

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A measure of how much an investment returned in relation to the amount of risk it took on. Often used to compare a high-risk, potentially high-return investment with a low-risk, lower-return investment.

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Risk adjusted return is a techniques used to measure investment returns after adjusting for risk.It divides expected return by capital at risk, which can be defined in a variety of ways. Some companies allocate capital using a hurdle rate for risk-adjusted return on capital.

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