Risk-Adjusted Returns

Why return alone is not enough, how measures like the Sharpe ratio compare return per unit of risk, and a 20-year comparison of three index funds.

Return is only half the story

Imagine two investments that both returned 10% a year. One rose steadily with small dips. The other swung wildly and fell 50% along the way. On paper, the returns are identical, but most people would much rather own the first. Risk-adjusted returns capture that difference by asking how much return you earned for each unit of risk you took.

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