1. What is Risk-Adjusted Return in Forex?

Definition: Risk-adjusted return (RAR) measures how much return an investment generates relative to its risk level in the forex market.

Purpose: It helps traders compare the performance of different currency pairs or trading strategies while accounting for their risk levels.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( RAR \) — Risk-adjusted return (dimensionless)
• \( R \) — Forex return (%)
• \( R_f \) — Risk-free rate (%)
• \( σ \) — Standard deviation of returns (%)

Explanation: The formula subtracts the risk-free rate from the forex return, then divides by the standard deviation to normalize the return by its volatility.

3. Importance of Risk-Adjusted Return

Details: A higher RAR indicates better risk-adjusted performance. This metric is crucial for evaluating trading strategies where high returns might simply be the result of taking excessive risk.

4. Using the Calculator

Tips: Enter your forex return percentage, risk-free rate (default 0.5%), and standard deviation of returns (default 1.0%). Standard deviation must be greater than 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good risk-adjusted return value?
A: Generally, RAR > 1 is good, > 2 is excellent, and > 3 is outstanding. However, these benchmarks vary by market conditions.

Q2: What risk-free rate should I use?
A: Common proxies are short-term government bond yields (e.g., 3-month T-bills). The default 0.5% is typical for many currencies.

Q3: How do I calculate standard deviation?
A: Use historical return data. Standard deviation measures how much returns fluctuate around their average.

Q4: Can RAR be negative?
A: Yes, if your return is less than the risk-free rate, indicating poor risk-adjusted performance.

Q5: How does this differ from Sharpe Ratio?
A: This is essentially the Sharpe Ratio formula, specifically applied to forex trading returns.