Series 66: Risk-Adjusted Return

Risk-Adjusted Return

Risk is another critical factor when assessing the performance of a security. In the context of investing, risk is defined as the volatility in the returns of a security. When volatility is high, the returns vary from high to low, so investors open themselves up to the possibility of bigger losses and bigger gains.

Imagine two bonds that have equivalent returns at the end of the same time period, but one bond is a high-yield junk bond and the other is an AAA bond. Most investors would judge the AAA bond to be the better investment. In fact, investors require compensation for risk, which is why