Glossary - Risk Adjusted Return
Risk Adjusted Return refers to the measurement of the profitability of an investment or portfolio, after considering the risk associated with it. It is a way to compare the returns of different investments, each of which may have diverse levels of risk. This metric is crucial because it provides investors with insight into how much risk is being taken to achieve a certain level of return, enabling a more apples-to-apples comparison across various asset classes or investment opportunities.
Also known as
- Risk-Adjusted Performance
- Adjusted Return
- Risk-Adjusted Return on Capital (RAROC)
Use cases examples
- Investment Portfolio Reports: The Risk Adjusted Return on equity investments was calculated to assess the performance of our portfolio, adjusting for market volatility over the quarter.
- Venture Capital Due Diligence: As part of our evaluation process, we analyze the Risk Adjusted Returns of potential startup investments to understand the expected return for the level of risk assumed.
Considerations for investors
- Evaluate the historical risk-adjusted returns of an asset class or investment vehicle to compare its performance relative to its risk level.
- Consider the risk tolerance of your investment portfolio and how adding or adjusting investments affects the overall risk-adjusted performance.
Considerations for founders
- Understand that investors will evaluate your startup not just on potential returns, but on the risk-adjusted basis of those returns.
- Be prepared to discuss the risks your business faces and how you mitigate them, as this can impact the perceived risk-adjusted returns for investors.
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