1. What is Risk-Adjusted Return?

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

Purpose: It helps investors compare investments with different risk profiles by showing return per unit of risk.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

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

Explanation: The formula subtracts the risk-free rate from the stock return (excess return) and divides by volatility (standard deviation).

3. Importance of Risk-Adjusted Return

Details: Higher RAR values indicate better risk-adjusted performance. It's crucial for comparing investments with different risk levels.

4. Using the Calculator

Tips: Enter the stock return (%), risk-free rate (default 2.5%), and standard deviation (default 15%). Standard deviation must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good RAR value?
A: Generally, RAR > 0.5 is good, > 1 is excellent, and > 2 is outstanding.

Q2: What risk-free rate should I use?
A: Typically use 10-year Treasury yields (2-5% range) or short-term T-bill rates.

Q3: How do I find standard deviation?
A: Calculate from historical returns or use stock analysis tools that provide volatility metrics.

Q4: Can RAR be negative?
A: Yes, if returns are below the risk-free rate (R < R_f).

Q5: What's the difference between RAR and Sharpe ratio?
A: This is essentially the Sharpe ratio formula, though sometimes Sharpe uses annualized values.