What is a risk-adjusted return?

The risk-adjusted return measures the profit your investment has made relative to the amount of risk the investment has represented throughout a given period of time. If two or more investments delivered the same return over a given time period, the one that has the lowest risk will have a better risk-adjusted return.

Should you use the Sharpe ratio for generating risk-adjusted returns?

There are a few challenges to using the Sharpe ratio for generating risk-adjusted returns in commercial real estate. The first challenge is that the calculation generally uses backwards-looking data. Investors rarely have the foresight to know how an individual asset will perform over a 10-, 20-, or 30-year period.

How do you measure risk?

The most common way to measure risk is by using the Sharpe ratio. The ratio describes how much excess return you receive for the extra volatility you endure for holding a riskier asset. The Shape ratio is calculated by using standard deviation and excess return to determine reward per unit of risk.

What is downside risk in a mutual fund?

Downside risk is the volatility of a portfolio’s return below a certain level. The level is based on average returns. The ratio measures the downside risk of a fund or stock. Like the Sharpe ratio, higher values indicate less risk relative to return. A mutual fund shows an annual return of 16% and downside deviation of 9%. The risk-free rate is 3%.