Risk-adjusted return
Also called: Sharpe ratio, return per unit of risk
A return judged against the risk taken to earn it, so that a higher return from a much riskier portfolio is not automatically counted as better.
The simplest approach is to compare returns alongside volatility and drawdowns. Ratios such as the Sharpe ratio divide the return above a risk-free rate by volatility, giving return per unit of volatility.
Such ratios are useful for comparing similar portfolios, but they rely on past volatility, which may not reflect future risk, and they ignore rare large losses.
Example
Portfolio A returns 12% a year with 10% volatility; portfolio B returns 14% with 25% volatility. Allowing for risk, A delivered more return per unit of volatility.
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