Risk-Adjusted Return
Risk-adjusted return measures investment performance relative to the risk taken, enabling comparison of opportunities with different volatility or uncertainty profiles.
| Risk Adjustment Method | Metric |
| Sharpe Ratio | (Return minus risk-free rate) / Standard deviation |
| Sortino Ratio | (Return minus risk-free rate) / Standard deviation |
| Risk-adjusted IRR | IRR adjusted for probability of scenarios |
| Value at Risk (VaR) | Maximum loss at confidence level |
| Coefficient of variation | Standard deviation / Mean return |
| Information ratio | Excess return / Tracking error |
| Example Comparison | Two Investments |
| Investment A | 15% return, 20% volatility, Sharpe 0.5 |
| Investment B | 10% return, 8% volatility, Sharpe 0.75 |
| Higher absolute return | Investment A (15% vs 10%) |
| Better risk-adjusted | Investment B (0.75 vs 0.5 Sharpe) |
| Interpretation | B delivers more return per unit of risk |
| Investor preference | Depends on risk tolerance and objectives |
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