What does risk-adjusted return represent?

• A. Return adjusted for risk.
• B. Return ignoring risk.
• C. Return only from risk-free asset.
• D. Return after taxes.

Answer: (A)

Risk-adjusted return measures what you earn for each unit of risk you take. It adjusts the raw return by factoring in the amount of risk, so you can compare investments that have different levels of volatility or risk.

This helps you see beyond the headline return. For example, two portfolios might both show 8% returns, but if one achieves that with much lower risk, it has a higher risk-adjusted return and is generally the better choice from a risk-management perspective. In practice, metrics like the Sharpe ratio quantify this idea by comparing excess return over a risk-free rate relative to volatility.

So the core idea is return expressed in relation to the risk taken, not just the raw return, not just returns from risk-free assets, and not after-taxes figures.