GLOSSARY TERM
Risk-Adjusted Return
Risk-adjusted return looks at return together with the level of risk taken to achieve it.
What does this mean in practice?
Two investments may have the same return, but one may have reached it with much larger swings, deeper losses or more uncertainty along the way. Risk-adjusted return helps compare investments more fairly by asking not only how much they returned, but also how difficult or risky that path was.
Example
Two funds both return 8% over a certain period. One of them moved up and down only moderately, while the other had large rises and sharp falls. Even though the return is the same, many investors would see the steadier fund as the better result on a risk-adjusted basis.
Why it matters
It helps you judge investments more thoughtfully. Long-term investing is not only about chasing the highest return, but also about finding an approach you can actually stay with through different market conditions.
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