via Wall Street Journal
When you hear financial experts talk about risk-adjusted returns, what do they mean? It may sound complicated, but the concept is simple.
It means that when comparing investment returns like those from mutual funds, it can be misleading to just look at the headline figures. For instance, at first glance it might seem that a fund that gained 12% last year is better than one at 9%. In reality, it depends on how much risk was involved in generating those profits. The more risk, the less the returns are worth.
There are many ways to measure risk, but the simplest is to look at volatility..