What is the goal of measuring risk-adjusted returns?

The goal of measuring risk-adjusted returns is fundamentally to assess returns relative to the amount of risk taken. This approach provides investors and analysts with a more nuanced understanding of how effectively an investment generates returns given the risk exposure involved.

By evaluating risk-adjusted returns, one can ascertain whether higher returns are a result of clever investment strategies or simply due to taking on excessive risk. This analysis helps in making comparisons across different investments that may offer similar returns but entail different levels of risk. Metrics such as the Sharpe Ratio or the Treynor Ratio are typically used to facilitate this evaluation, allowing for informed decision-making based on both performance and risk.

The focus on the relationship between returns and risk underscores the importance of not only seeking high returns but also ensuring that those returns are sustainable in the context of the risk profile of the investment.