What is risk adjustment return?

Risk adjustment is the ratio which is used to calculate the amount of risk taken to earn the profit. The return calculated with the help of ratio. It is calculated with the individual securities, mutual funds and portfolio. The risk calculated on the basis of return collected to the risk earned.

How to compare investment?

The investment in the mutual fund, assets, bonds and stocks are calculating return of band by subtracting return of assets.

How to measure the volatility?

Volatility is the important measure of risk. The assets or investment which is more prone to risk is called as the volatile risk. In mathematical, higher the standard deviation the asset is more volatile.

How the risk adjustment return is calculated?

The risk adjustment is calculated with the alpha, beta, R-squared, standard deviation and Sharpe ratio. All of the measure should be taken to calculate the risk adjustment return.

1. Alpha:-

What is status of investment is calculated with the alpha. Alpha includes sensex, nifty etc. It provides the caliber of fund manager.

2. Beta:-

Beta provides the volatility and how much risk is involved in the investment. It gives the value against market. The value is more than 1 it is more volatile.

3. Standard Deviation:-

Standard deviation measures the how much the assets returns vary over the observed period to its compared mean or average returns. It is used to calculate steady assets return. This is useful to calculate steady assets return.

4. R squared:-

R squared is used to calculate the statistical measure is taken in percentage from 1-100. The higher the number the more the portfolio moves in the ranking. A low number suggest the less correlation with the index.

5. Sharpe ratio:-

It is the ratio of how much the investor is getting in relation with the risk is taken for the investment. Increasing sharpe ratio indicates more return to the investment.

6. Omega Ratio:-

Omega ratio returns observations that are above and below a certain threshold. It divides the cumulative ratio.

7. Calmar ratio:-

Calmor ratio divides the return by the drawdown observed to the lookback period.

8. Treynor measure:-

It is simple calculation of risk premium to the unit of risk.

Why to take risk while making investment?

Risk taking is important while making an investment because it is useful to assess the investment by the fund manager, consultant or advisor. It is ideal condition that fund manager should take minimum risk and deliver superior result. It is useful to analyze the risky investment to non-risky investment.

What is importance of risk adjustment returns?

Risk can be positive or negative. If the customer wants to achieve the higher return in long turn investment then they must keep open mind for incurring losses. It is the customer tolerance capacity which decides the volatility of risk. It is used to calculate the return on different investment with different level of risk. If the particular asset shows the low risk then the return on the asset above the risk free rate will be considered as gain. Risk adjustment return allows you to compare the risk between two or more investment. To examine the changes in the risk free rate that not done by the other risk free rate. One can compare actual return with the benchmark index.

How to increase the portfolio Return?

There are few ways to increase the return.

1. Equity for bonds:-

Equity carries the highest risk than bonds hence the combination of both can increase return with low volatility.

2. Smaller and larger companies:-

Smaller companies are more tended toward risk as compared to the large companies. The smaller companies are more at risk because of smaller operations, very low employee count, small track record. But the investment in the small to midsize company have proven more advantage as per cap stock are concern.

3. Managing the expenses:-

There are two types of managing expenses

a. Active Management:-

Active management consist of the high price research analyst, technicians and economist who are always searching for next best investment for portfolio.

b. Passive Management:-

Passive management is used to minimize the investment cost and decreases chances of the fraud investment.

4. Diversification:-

Diversification is the process of investing in the different types of assets. It reduces the risk of concentrated investment in same field or area. Since the each of the investment are different than each other the possibility of returns has been increases. A diverse portfolio with the various kind of assets have seen the increase in return.

5. Rebalancing:-

It is simple method of adjusting portfolio with the original allocation. Rebalancing can be done with the adding new cash in underweight portion of portfolio. The selling of portion of the overweight piece and adding these to the under weighted class. The withdrawals from overweight class will also help to balance the risk. Rebalancing is the effective, smart and automatic way to manage the portfolio.


The investor of today is trying to create the portfolio of risk adjusted positive return. Changing dynamics of investment are helpful for creating the positive return. The investor must look for the changing market style.





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BankReed Admin

Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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