Scuba Diving Book

SCUBA Diving (Eyewitness Companions) by Monty Hall and Miranda Krestovnikoff

Risk-Adjusted Return

Adjusting Return Rate with Risk

When comparing returns from different investment vehicles, it's meaningless to purely compare the numbers of the return rates. For example,

[Investment A]
Return rate: 5%
Risk: σ = 2%

[Investment B]
Return rate: 5%
Risk: σ = 1%

Note: σ (Standard Deviation can be a measure of the volatility of the Return rate, i.e. the risk)

It's obvious that Investment B is a better choice - Given the same return rate, it experiences less risk.

Reference:

• Risk-Adjusted Return
• Sharpe Ratio
• Sortino Ratio