what is a risk adjusted return 
a risk adjusted return is a calculation of the profit or potential profit from an investment that considers the degree of risk that must be accepted to achieve it the risk is measured in comparison to that of a virtually risk free investment usually u s treasuries depending on the method used the risk calculation is expressed as a number or a rating risk adjusted returns are applied to individual stocks investment funds and entire portfolios understanding risk adjusted returnthe risk adjusted return measures the profit your investment has made relative to the amount of risk the investment has represented throughout a period if two or more investments delivered the same return over a given time the one with the lowest risk will have a better risk adjusted return analysts can use a mar ratio to compare the performance of trading strategies hedge funds and even trading advisors some common risk measures used in investing include alpha beta r squared standard deviation and the sharpe ratio when comparing two or more potential investments you should apply the same risk measure to each investment under consideration to get a relative performance perspective different risk measurements give investors very different analytical results so it is important to be clear on what type of risk adjusted return is being considered examples of risk adjusted return methodshere is a breakdown of the most commonly used measurements the sharpe ratio measures the profit of an investment that exceeds the risk free rate per unit of standard deviation it is calculated by taking the return of the investment subtracting the risk free rate and dividing this result by the investment s standard deviation all else equal a higher sharpe ratio is better the risk free rate used is the yield on very low risk investment usually the 10 year treasury bond t bond for the relevant period for example say mutual fund a returned 12 over the past year and had a standard deviation of 10 mutual fund b returned 10 with a standard deviation of 7 and the risk free rate over the period was 3 the sharpe ratios would be calculated as follows even though mutual fund a had a higher return mutual fund b had a higher risk adjusted return meaning that it gained more per unit of total risk than mutual fund a the treynor ratio is calculated the same way as the sharpe ratio but uses the investment s beta in the denominator as with the sharpe a higher treynor ratio is better using the previous fund example and assuming that each of the funds has a beta of 0 75 the calculations are as follows here mutual fund a has a higher treynor ratio meaning the fund earns more return per unit of systematic risk than fund b here are some of the other popular risk adjustments special considerationsrisk avoidance is not always a good thing in investing so be wary of overreacting to these numbers especially if the measured timeline is short in strong markets a mutual fund with a lower risk than its benchmark can limit the real performance that the investor wants to see a fund that entertains more risk than its benchmark may experience better returns in fact it is common knowledge that higher risk mutual funds may accrue greater losses during volatile periods but they are also likely to outperform their benchmarks over full market cycles 