What is Risk-Adjusted Return?
Investment return measured relative to the amount of risk taken to earn it.
Formal Definition
Risk-adjusted return evaluates performance in the context of risk, so that gains earned with high volatility or deep drawdowns are not treated the same as steadier gains. Common measures include the Sharpe, Sortino, and Calmar ratios and Jensen's alpha. It is the fairer basis for comparing strategies than raw return alone.
In Simple Terms
It is judging an investment not just by how much it made, but by how much white-knuckle risk it took to get there. A calm 8% can beat a terrifying 12% once risk is counted.
Example
A fund up 15% with wild swings may have a worse risk-adjusted return than one up 11% with a smooth, steady climb.