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The risk of an investment can be measured by observing how volatile the return of that investment has historically been over a period of time.
The risk of an investment can be measured by observing how volatile the return of that investment has historically been over a period of time.
Return on investment is directly related to risk of investment--the riskier an investment is, the more you have to pay people for making it.
An investment.
higher the potential risk.
The Sharpe Ratio is a financial benchmark used to judge how effectively an investment uses risk to get return. It's equal to (investment return - risk free return)/(standard deviation of investment returns). Standard deviation is used as a proxy for risk (but this inherently assumes that returns are normally distributed, which is not always the case). See the related link for an Excel spreadsheet that helps you calculate the Sharpe Ratio, and other limitations.
Return on investment is the amount of profit on the invested money after deducting taxes, safety of investment is the risk factor involved in the investment. Such as risk is high safety of investment is less.
Investment return and risk are fundamental to understanding market behavior. Return on investment is essentially profit made by an investor. Profits and losses must be analyzed carefully, as simple percentage comparisons give misleading answers. Risk refers to the probability of depreciation as well as its potential magnitude, which can exceed original invested amount. Risk and return on investment are directly correlated; higher risk begets a smaller chance of high return and vice versa.
Risk and return are not a function together, but affect one another indirectly by determining optimal levels of investment. Return is roughly the benefit of investing money into assets; risk is part of the cost of investing that money (due to uncertainty). The varying levels of risk and return change the cost and benefit of investing, thus shifting the equilibrium values of investment.
12.5%
The two main parameters are: * Returns - Amount of returns we can expect on the investment * Safety/Risk - How risky the investment is. Generally risk and returns are directly proportional. Higher the risk on investment, higher would be the return on investment.
To calculate excess returns, subtract the risk-free rate of return from the actual return on the investment. Excess returns show the additional return earned above the risk-free rate, which represents the compensation for taking on additional risk. It is commonly used to evaluate the performance of an investment or portfolio.