Risk-adjusted return is the measure of return per unit of risk. To measure it, you take the return on your security and subtract the expected market return or the risk-free return of a 10-year U.S. Treasury. Then, you divide by some measure of volatility, like beta or standard deviation. It is excess return divided by the volatility of the security. Fixed income investments will generally have higher risk-adjusted return than equities because of the equities’ volatility. Risk-adjusted return is a backwards looking measurement. We do not believe you can judge a portfolio on risk-adjusted return alone.
For example, consider two money managers. The aggressive manager buys stocks that are twice as risky as the market. He is up 11% for the year. The conservative manager buys stocks that are half as risky as the market, and he is up 10% for the year. If the market is up 10%, the conservative manager performed better on a risk-adjusted basis than the more aggressive manager who beat the market.
At Henssler Financial, we control risk by diversification across multiple sectors and industries. We are a high quality manager that strives to avoid bankruptcy risk in the companies we own. Additionally, we own dividend-paying stocks, which tend to be more stable in their price. We also aim to control risk by considering your investment time horizon. With money you need to remain safe, we recommend investing in non-volatile assets, like high quality bonds. With money that is not needed within 10 years, we recommend investing in more volatile assets like stocks, in order to achieve growth.
If you have any questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
