The performance notes compare return with the risk taken to earn it. The Sharpe ratio uses excess return divided by volatility, while beta measures sensitivity to a common market factor. The capital asset pricing model summarizes the factor relation as
\n$$\\mathbb E[R_i]-R_f=\\beta_i\\bigl(\\mathbb E[R_m]-R_f\\bigr).$$
\nThe class also discusses relative measures and the danger of ranking portfolios without matching their horizons or benchmarks. A high raw return can be a poor outcome if it came from concentrated or illiquid exposure. Risk-adjusted performance is therefore a comparison of both payoff and distribution, not a replacement for understanding the position itself.
","contentMarkdown":"The performance notes compare return with the risk taken to earn it. The Sharpe ratio uses excess return divided by volatility, while beta measures sensitivity to a common market factor. The capital asset pricing model summarizes the factor relation as\n\n$$\\mathbb E[R_i]-R_f=\\beta_i\\bigl(\\mathbb E[R_m]-R_f\\bigr).$$\n\nThe class also discusses relative measures and the danger of ranking portfolios without matching their horizons or benchmarks. A high raw return can be a poor outcome if it came from concentrated or illiquid exposure. Risk-adjusted performance is therefore a comparison of both payoff and distribution, not a replacement for understanding the position itself.","dataUrl":"https://sharifhsn.dev/api/posts/risk-adjusted-performance.json","date":"2024-09-12","datePublished":"2024-09-12","description":"The performance notes compare return with the risk taken to earn it. The Sharpe ratio uses excess return divided by volatility, while beta measures sensitivity to a common market f…","site":"https://sharifhsn.dev","slug":"risk-adjusted-performance","source":"FE-535 | Risk Management","sourceUrl":null,"tags":["Risk Management","CAPM","Risk-Adjusted Performance"],"title":"Risk-Adjusted Performance","url":"https://sharifhsn.dev/blog/risk-adjusted-performance/","version":"1","wordCount":97}