Our Funds
Related Links
Tools View All
Knowledge Hub Explore
Investment Frameworks
Insights View All
Obsessed with helping you invest better. Trusted by 50L+ investors*
Services
If you are a first-time investor or new to DSP, Get started here
New to IFAXpress? Sign up
Uh-oh! No results found. We're on it!
Listening ...
This will help us to improve and provide you a better experience.
What is Risk Adjusted Return? How can Risk Adjusted Return can be calculated?
An investor education & awareness initiative.
When you compare the performance of two investments or check returns of your portfolio, you should not only consider the returns generated by the investments but also the amount of risk taken to earn these returns. Risk-adjusted return can help you measure the same. It is a concept that is used to measure an investment’s return by examining how much risk is taken in obtaining the return. Risk-adjusted returns are useful for comparing various individual securities and mutual funds, as well as a portfolio.
Comparing investments: A simple way to compare two investments, whether they are mutual funds, stocks or portfolios, is to use a benchmark, which is usually a government bond (since the interest earned on a government bond is considered to be risk-free). We use a term (RF-RFR), which is arrived at by taking the return of the bond and subtracting it from the return of the asset.
RF-RFR=Return of Bond-Return of the Asset
The return that we get is over and above what can be earned risk-free. This term (RF-RFR) is then multiplied by the ratio of the risk level of the market divided by the risk level of the asset. The asset with the lower risk level than the market should generally be preferred.
Measuring volatility: Volatility is an important measure of risk. The more volatile an investment is, the more it is prone to risk. Usually standard deviation is used to measure volatility by the following methodology:
The higher the standard deviation, the more volatile the asset is.
How can risk-adjusted returns be calculated?
If we speak of risk-adjusted returns, there are five measures that can be used - Alpha, Beta, R-squared, Standard Deviation and Sharpe Ratio. All of these measures give specific information to investors about risk-adjusted returns. Let’s have a closer look at risk-adjusted returns and how they can be measured:
Alpha: If you want to know how well an investment is doing, then Alpha is a good measure. It is simply the measure of an investment against a benchmark index such as the Sensex, Nifty, etc. Alpha provides a picture of the talent of a fund manager or a portfolio manager because you can see if you are getting returns that are outperforming the benchmark.
Beta: Beta is a measure of volatility and indicates how much risk is involved in an investment compared with the broader market. A Beta value against the market. A Beta value higher than 1 will indicate more volatility in your chosen investment as compared to the market.
Standard Deviation: Standard deviation simply measures how much an asset’s returns vary over the observed period compared to its mean or average returns. This is a useful measure since you can learn more about how steady an asset’s returns are.
R-squared: R-squared is used to see the correlation of a portfolio’s price trends with a benchmark. While Alpha measures performance, R-squared is more concerned about movement. This statistical measure is taken in percentage terms and ranges from 1-100. The higher the number, the more your portfolio moves in alignment with the chosen benchmark. A low R-squared number usually suggests less correlation with the index.
Sharpe Ratio: Sharpe ratio basically measures how much return an investor is getting in correlation to the level of risk he is exposing himself to. Basically the Sharpe ratio works by taking into consideration how the asset performed and then subtracting that return from the returns that could have gotten from a risk-free instrument like a government security. Now you take that number and divide it by the standard deviation of the asset. This will provide you the Sharpe ratio. The higher the ratio, the more you are being rewarded for the risk that you are taking.
Why you should account for risk while investing?
Accounting for risk while investing is important because:
1. It is a measure of fund management: Measuring risk is a logical and objective method of establishing the skills of your fund manager, advisor or financial consultant. Ideally a fund manager aims to take least risk and deliver superior returns.
Risk is also an opportunity
When it comes to investments, just like in life, the higher risk you take, the more the chances that you’ll make more returns. So don’t simply ignore an investment option which strikes you as risky. Instead, evaluate how much risk you are actually willing to take, and if you are considering said risky product, then also evaluate how much of your portfolio should be invested at such risk levels.
Investing should be based on data and facts, and how much risk you are taking to get the returns you aim for. Assessing the risk-return link will give you an idea about the level of possibility of actually making money on a given investment or suffering a loss. This will help you make informed choices and reduce the element of chance from your portfolio.
Key Takeaways
Disclaimer: All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/redress complaints, visit dspim.com/IEID. This is an investor education & awareness initiative by DSP Mutual Fund.
Sign up for our newsletters.
Investor Relations Officer, DSP Asset Managers Private Limited, Natraj, Office Premises No.302,3rd Floor, M V Road Junction. W. E. Highway, Andheri(East), Mumbai-400069, Tel.:022-67178000.
Mutual fund investments are subject to market risks, read all scheme related documents carefully. © DSPAM 2024.
Any information regarding securities offerings, or references to securities offerings, that are contained on these pages do not constitute or form part of any offer of securities for sale or the solicitation of an offer to purchase securities in the United States or in any other jurisdiction where such offer may be restricted. The information in the coming pages is not intended for, and is not to be made available to, persons in the United States (being persons resident in the US, corporations, partnerships or other entities created or organized in or under the laws of the US or any person falling within the definition of the term "US Person" under the US Securities Act of 1933, as amended), wherever located. Any information regarding securities offerings, or references to securities offerings, that are contained on these pages do not constitute or form part of any offer of securities for sale or the solicitation of an offer to purchase securities in the United States or in any other jurisdiction where such offer may be restricted. In no event shall DSP Mutual Fund and / or its affiliates or any of their directors, officers and employees be liable for any special direct, indirect, special, incidental or consequential damages arising out of the use of information / opinion herein. The site, texts, images, designs, pictures, sounds, photographs, animation, and videos together with their layout and more generally all the items contained on this website are the sole property of DSP Asset Managers Pvt. Ltd. This site and all of the elements on this site are protected by Indian Law and by International copyright agreements concerning intellectual property. The content of this website must not be copied, modified, reproduced, distributed, transferred, edited or made accessible to third parties for any purposes whatsoever without obtaining prior permission from the owners of this website. *No. of unique investors who had invested with DSP at any time. ^Includes domestic AUM only, as on Dec 31, 2023 @ copyright DSPAM All rights reserved.
By submitting, I agree to receive a call from DSPAM for assistance.
We have received your query and will get back to you shortly.
Gain access to our latest articles on the world of investments.
Monthly update on all the information related to our funds.
Monthly insights on the economy and markets.
To help you our services, we would be grateful if yo could tell us why:
Mention reason
Describe reason
Update your preferences
The email address [email protected] has been removed from our mailing list. you will no longer hear from us.