Risk-adjusted performance

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Risk-Adjusted Performance

The performance of a security or investment relative to its risk. One may calculate the risk-adjusted performance in a number of ways. One may consider the investment's volatility. Alternatively, one may compare its performance to the performance of the market as a whole or relative to securities or investments with similar levels of risk.

Risk-adjusted performance.

When you evaluate an investment's risk-adjusted performance, you aren't looking simply at its straight performance figures but at those figures in relation to the amount of risk you took (or would have taken) to get the return the investment produced.

One method is to investigate the investment's price volatility over various periods of time, including different market environments.

For example, you might consider how far the price fell in the most recent bear market against its price in a bull market, or how it performed in a recent market correction. In general, the greater the volatility, the greater the risk.

However, many analysts believe that looking exclusively at past performance can be deceptive in evaluating the risk you are taking in making a certain investment, since it can't predict what will happen in the future.

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