Risk-adjusted return


Also found in: Acronyms.

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 ?
There are three steps involved in calculating the Morningstar Risk-Adjusted Return (MRAR).
The product delivers a robust economic capital and risk-adjusted return on capital (RAROC) framework for linking risk to required capital.
It's conceivable that every financial decision made on behalf of the business will be based on risk-adjusted return models delivered on the desktop.
Today's hard market is also distinguished by increasing senior management attention to risk-adjusted return on capital of each separate line being underwritten.
Most recently, industry leaders have begun to take a more holistic view of risk, capital and return by implementing enterprise-risk models based on methodologies such as dynamic financial analysis (DFA), value at risk (VaR) and risk-adjusted return on capital (RAROC), reports Risk Management Solutions, Newark, Calif.

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