Person 1: I am confused!
Person 2: What’s the matter?
Person 1: Fund A might give higher return but has higher risk. Fund B might give lower return but has lower risk. How to compare the two?
Person 2: Compare their risk-adjusted returns.
Person 1: What’s that?
Person 2: It is a measure of the return on an investment relative to the risk of that investment.
Person 2: That is, you factor in the riskiness of an investment while evaluating the returns of that investment.
Person 1: For example??
Person 2: For example, if two funds gave 20% return each, then the less risky fund would have a better risk-adjusted return.
Person 1: Gee, thanks!