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Risk-Adjusted Returns

Updated: Nov 24, 2023

In comparing two investments based on the following data:

Investment A:

  • Return: 10%

  • Standard deviation: 5%

Investment B:

  • Return: 8%

  • Standard deviation: 2%

While Investment A has a higher return, Investment B offers a more attractive risk-adjusted profile. The lower standard deviation of 2% for Investment B indicates a narrower range of volatility or uncertainty.

Risk-Adjusted Returns:

Calculating the Sharpe ratio, which is a measure of risk-adjusted return:

  • Investment A's Sharpe Ratio: 1.0

  • Investment B's Sharpe Ratio: 1.5

A higher Sharpe ratio signifies better risk-adjusted performance. Investment B's higher ratio indicates a superior return relative to its lower risk, making it a more favorable option for investors seeking a balance between returns and risk management.


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