Risk-Adjusted Performance

What this unit covers

Learn to compare two portfolios by return per unit of risk, not raw return alone, a simplified version of the idea behind the Sharpe ratio.

By the end you will be able to

• Explain why raw return alone can be a misleading way to compare two portfolios.
• Calculate a risk-adjusted score by dividing return by volatility.
• Recognise that a higher score reflects past efficiency, not a guarantee of future results.

How it starts: Two Portfolios, One Return

1. A statement shows two portfolios you could have chosen a year ago.
2. One returned 18 percent for the year, the other only 14 percent.
3. Which one actually earned its return more fairly?

Words you will meet

Risk-adjusted return

Performance measured by return earned relative to the risk taken to earn it, not by return alone.

Volatility

A measure of how much a portfolio's value swung up and down over a period.

Return

The gain or loss on an investment over a period, usually shown as a percentage.

In this module: Portfolio Analytics

1. Return and Drawdown
2. Correlation and Concentration
3. Risk-Adjusted Performance (this unit)
4. Portfolio Review