Risk-adjusted return

What is risk-adjusted return

Risk-adjusted return is a metric that considers not only the achieved return, but also the level of risk the investor took on. The goal is to compare investments fairly – two investments with the same return may not be equally attractive if one achieves its result with lower volatility and the other with higher volatility.

Why it matters

• Objective comparison – enables comparison of investments with different levels of risk.
• Better decision-making – helps investors choose strategies that offer the best trade-off between return and risk.
• Capital protection – flags cases where high returns come at the cost of disproportionate risk.

Most commonly used metrics

• Sharpe ratio – measures how much excess return an investment delivers per unit of risk.
• Sortino ratio – similar to the Sharpe ratio, but takes only downside volatility into account.
• Alpha – determines by how much an investment outperformed or underperformed a market benchmark on a risk-adjusted basis.

How it is used in practice

Using risk-adjusted return, an investor can:

• Evaluate whether it is better to invest in a less volatile ETF or in individual stocks.
• Assess portfolio performance against the S&P 500 while taking volatility into account.
• Optimize the risk-return trade-off within asset allocation.

Risk-adjusted return on Stonkee

On Stonkee, users can easily see the risk-adjusted returns of their investments, both at the level of individual positions and for the entire portfolio. This lets them quickly spot whether they are achieving good results without taking on excessive risk.

Summary

Risk-adjusted return is a key metric for every investor who wants to deliver stable and sustainable returns over the long term. It helps avoid illusory successes built on excessive risk and enables a fair comparison of different investments.