Imagine there was a financing, which is typically 5% per annum, and the B fund, which returned 4% over the same period. Would you say that the fund was a superior investment? Well you can say that if the returns were all that you had to go through.
But what if I told you that the fund was a mutual fund that invests in a basket of Shares, Fund B partnership special account?
Well, in this case, you’ll probably realize that the box B was superior since I was born 4% returns on almost no risk, while the fund’s maybe underperformed compared with their counterparts that had undertaken a similar risk. Nominal return of 1% in Fund B was probably modest relative to the much higher risk portfolio you know.
Risk-adjusted returns is an important concept to take into account when assessing the performance of a particular asset or class of the fund, which will help you make better investment decisions.
What risk-adjusted returns mean?
Risk-adjusted returns to measure an investment’s return relative to the amount of investment risk you know.
Common ways to measure the risks include the Sharpe ratio, beta, R-squared. Because each of these risk measures use a different methodology to measure the risk, investors should take care to only measure risk-adjusted returns of two investments using the same measure of risk.
Measuring risk-adjusted returns using the Sharpe ratio
The Sharpe ratio is a measure of the investment returns above the risk-free rate, per unit of standard deviation. In simple terms:
(Investment return – risk free rate) / standard deviation of investment
All else being equal, the higher the Sharpe ratio, the better.
What constitutes a “risk-free” investment returns can vary, but Treasury bills issued by the central bank (in our case, mas), usually taken as a reference. For those who are not familiar with standard deviation measures the volatility of investment returns relative to the average yield.
As an example we have a fund C fund D, which yielded an impressive 10% per year. The latest round of treasury bills issued by the MAS on 31 July 2018 gives the average yield of 1.59% per annum, let’s say the standard deviation on funds C and D 5% and 15%, respectively. Let’s see which fund gave the best risk-adjusted returns.
Fund C Sharpe ratio = (10% – 1.59%) / 5% = 1.682 for
Fund d Sharpe ratio = (10% – 1.59%) / 10% = 0.841
As you can see, despite all the investments have achieved the same return one of them could be substandard, and the risk that it took.
Temasek uses the risk-adjusted returns to measure performance
Temasek Holdings believes the overall risk-adjusted methodology that takes into account the inherent risks and to measure their performance. For each type of investment, it puts the same “obstacles” (internal standards) and measures the success of how much value can be added Beyond the typical as risk-adjusted return.
Prior results do not (really) matter
There is a problem basing your investment methodology based solely on backtested data. After all, if my ‘investment strategy during the World Cup final was to invest all he had in France, it looks like this was a great strategy that has achieved fantastic returns. But if I were to understand that you’re taking a risk, relative to back then may not look appetizing.
It is a good strategy to ‘invest all your money in France in the next World Cup? Obviously not because like the stock market, Past performance is not indicative of future results, but what is certain is the risk that each investment holds.
So in the next financial الإعلانيةviser cherry-picks the unit trust and show you how well performed, look deeper and understand how dangerous this fund took, and if you look beyond that, maybe you’ll see the bodies of many other unit trusts in the level who were not ‘lucky’.
If you are interested to learn more about risk management, check out this video we produced: