ANALYSISM26

Risk-Adjusted Returns and Portfolio Metrics

Measure performance not just by return, but by how much risk was taken to earn it, using Sharpe, Sortino, and Treynor ratios.

Learning Goals

  • Use Sharpe, Sortino, and Treynor ratios appropriately.
  • Understand volatility, downside risk, and beta.
  • Compare investment options on a risk-adjusted basis.

Core Concepts

Sharpe Ratio
Beginner

Sharpe measures excess return per unit of total volatility. Higher is generally better for diversified portfolios.

Sortino Ratio
Beginner

Sortino measures return per unit of downside volatility, focusing on negative returns rather than total swings.

Treynor Ratio
Beginner

Treynor measures return per unit of market risk (beta), useful for comparing portfolios with different systematic risk.

Indian Market Context

Indian mutual fund reports often include alpha and beta. Use these alongside absolute return when evaluating funds.

Hands-On Calculators

Future Value Calculator
Future Value₹3,10,585

Gain: ₹2,10,585

Behavioral Insight

🧠 RETURN CHASING: Investors reward high nominal returns without checking whether those returns came from taking excessive risk.

From History

Risk-Adjusted Returns and Portfolio Metrics

Some mid-cap funds posted spectacular returns but had low risk-adjusted scores because they were extremely volatile.

Take the Quiz

Module Quiz
Sharpe ratio measures:
A higher Sortino ratio is preferable to a lower one.
The Treynor ratio uses which risk measure?