Risk adjusted returns is the measure of the return on an investment relative to the expected risk of that investment, over a specific period. Risk adjusted returns are often used when comparing potential investment opportunities, particularly if the opportunities have different risk profiles or expected holding periods. For instance, Investment A may have a projected return of 12% but is expected to take 10 years and incur a high level of risk, while investment B may only project a return 9% but is 2 year expected hold and with a low level or risk. Based on these two options, an investor may conclude that investment B has a higher risk adjusted return even though it has a lower expected return.
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