The concept of riskadjusted return helps investors make informed decisions from "summary" of How Finance Works by Mihir Desai
Investors are faced with a myriad of choices when it comes to where to put their money. One key consideration in making these decisions is understanding the concept of risk-adjusted return. This concept allows investors to weigh the potential return of an investment against the level of risk involved. By taking into account the inherent risks of an investment, investors can make more informed decisions about where to allocate their funds. The idea behind risk-adjusted return is to evaluate how much return an investment is expected to generate relative to the level of risk it carries. This means that investors can compare investments on an apples-to-apples basis, considering not just the potential return, but also the amount of risk they are taking on. In this way, investors can better assess whether an investment is worth the risk, or if there are better opportunities available. By factoring in risk when evaluating potential investments, investors can avoid making hasty decisions based solely on the promise of high returns. This approach helps investors avoid unnecessary losses and protect their investment portfolios over the long term. It also allows investors to align their investments with their risk tolerance and financial goals, ensuring that their money is working for them in the most effective way possible.- The concept of risk-adjusted return empowers investors to make more informed decisions about where to allocate their funds. By taking into account both the potential return and the level of risk associated with an investment, investors can assess whether an opportunity is truly worth pursuing. This approach not only helps investors protect their wealth, but also enables them to build a diversified portfolio that is well-suited to their individual financial circumstances.
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