Risk-adjusted return

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Risk-adjusted return

Often we subtract from the rate of return on an asset a rate of return from another asset that has similar risk. This gives an abnormal rate of return that shows how the asset performed over and above a benchmark asset with the same risk. We can also use the beta of the asset multiplied by the benchmark return to create a hypothetical asset that has the same risk characteristics. The difference between the asset return and the beta times the benchmark is the risk adjusted return and is also known as the alpha.

Risk-Adjusted Return

The return on an asset or investment relative to the return on assets and investments with similar risk. The risk-adjusted return can help an investor determine whether he/she is extracting the highest possible return for the least possible risk. One way to calculate the risk-adjusted return is to take the Sharpe ratio.
References in periodicals archive ?
To develop meaningful risk adjusted return targets, which can be used to assess various strategic options as well as impact goals and incentives.
The key to maximizing a portfolio's profitability is a comprehensive analysis that reviews the risk adjusted return of every location in the portfolio.
Guru Ramakrishnan, Managing Director at Morgan Stanley, added that "The Morgan Stanley-Algo partnership will provide the right framework for establishing industry transparency, appropriate benchmarking, and risk adjusted return metrics which will be critical to the ongoing success of the hedge fund industry.
RMS, Oliver Wyman & Company, and eRisks are partners in the development of P&C RAROC, Property & Casualty Risk Adjusted Return on Capital, a set of proprietary methodologies to assist Property and Casualty insurers and reinsurers in managing risk, capital and shareholder value across all risk types and activities.
At year-end 1998, risk adjusted return on assets was negative 20%.
Over the past 10 years, Oliver Wyman & Company has assisted many of the world's largest commercial and investment banks in developing methodologies that link risk to required capital (Economic Capital) and measure Risk Adjusted Return on Capital (RAROC).
The current risk adjusted return on assets is negative and the 1997 operating ratio of 222.
The risk adjusted return on assets indicates a combination of poor historical underwriting performance with excessive earnings volatility.
In our case we manage our reserves in such a way as to insure safety, liquidity, and risk adjusted returns.
Carry Trade Survival Kit In this report, we argue that carry traders can increase their risk adjusted returns by tracking the levels of three different inter-market indicators: FX implied volatility, options risk reversals and interest rate expectations.
Going forward, we will continue choosing our transactions selectively, both on the debt and equity side, while seeking appropriate risk adjusted returns.
The addition of Bill will further enable us to address the investment needs of our institutional clients and develop investment products that we believe will be successful in delivering superior risk adjusted returns in varying interest rate environments," said Robert Caruso, Managing Partner and Chief Operating Officer, Highbridge Capital Management.

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