LARGE RETURNS!

MASSIVE GAINS!

We see these words all the time

What we don't see is the risk involved behind the scenes

Let's talk about it in

"You Can't Unlearn Risk Adjusted Return"

- A THREAD -

We all know what risks are

And there are plenty to be aware of when investing:

- Market risk
- Liquidity risk
- Operational risk

The list goes on...

But do you know how to measure Risk Adjusted Return?

Only measuring returns isn't good enough

I'll show you how to do it

What is the Risk Adjusted Return?

It's the amount of return your investment makes or will make relative to the amount of risk you take on

Why is this important?

Because with larger returns comes larger risk

And if you're an investor

You should be able to measure it

For someone who isn't much of a gambler...

The Risk Adjusted Return has saved me from making poor investment decisions time and time again

Let's look at an example:

Company A returned 20% last year

Company B returned 15% last year

Which ones the better investment?

An unintelligent investor would obviously pick Company A at 20%

But you're intelligent

So you say the following:

"I need to know the Risk Free Rate of Return and both companies Beta's before I make my decision"

But what the hell is the Risk Free Rate of Return and Beta?

The Risk Free Rate of Return is how much return you would expect from an investment with zero risk

Obviously every investment carries some sort of risk so this is theoretical...

But you can find the Risk Free Rate with just a simple google search

Why do we need it?

Since we're looking at the Risk Adjusted Rate of Return (rate of return relative to risk) we need to subtract the Risk Free Rate of Return (zero risk) from the Rate of Return

Confused?

I'll give you the formula but just keep that in mind for now...

Why do we need Beta?

It is a measure of an investment's volatility in relation to the market as a whole

And it gives us a better idea of how much the price will fluctuate depending on how the market is performing

The higher the Beta the more volatile the price will be

Once you have both pieces of information...

It's decision time!

To make our decision about which ones a better investment we can use the "Treynor Ratio"

Here's the formula:

Back to the example:

Let's say the Risk Free Rate of Return is 3%

Company A's Beta = 1.5
(20% return)

Company B's Beta = 0.9
(15% return)

Which ones the better investment now?

Prepare yourself for some quick math...

Company A = (20% - 3%) / 1.5

This gives us a Risk Adjusted Return of 11.33%

Company B = (15% - 3%) / 0.9

This gives us a Risk Adjusted Return of 13.33%

As you can see, Company B is actually the better investment of the two

Despite last years lower rate of return

Why?

Because with larger returns comes larger risk

But now that you have the tools to measure the Risk Adjusted return

You'll never be fooled again

And you can start making better investment decisions because of it

If you want to learn more about performing your own investment analysis

Check out The Complete Investors Accelerator Pack

I go much more in-depth and teach you how to use it to find the most profitable companies in the market

Start investing like a pro https://bit.ly/dividendmoney