Enter the return of the investment, the risk-free rate, and the investment’s standard deviation into the calculator to determine the risk-adjusted return.

Risk-Adjusted Return Formula

The following formula is used to calculate a risk-adjusted return.

RAR = (IR – RFR) / STD

  • Where RAR is the risk adjusted return
  • IR is the investment return (%)
  • RFR is the risk free rate (%)
  • STD is the standard deviation

Definition

What is a risk-adjusted return?

A risk-adjusted return is a measure of the return of an investment relative to a “risk-free” investment such as a bond, with respect to the investment standard deviation.

Example Problem

How to calculate a risk-adjusted return?

The following example goes over the necessary steps and information needed to calculate a risk-adjusted return.

First, determine the total percentage return of the investment. In this example problem, the investment return is found to be 6%.

Next, determine the risk-free rate. This is a percentage return an investor could get if they put their money in an asset without risk, like a bond. In this case, the risk-free return is 2%.

Next, determine the standard deviation of the investment return. On average, the investment return has a variation of 10%.

Finally, calculate the risk-adjusted return using the formula above:

RAR = (IR – RFR) / STD

RAR = (6 – 2) / 10

RAR = .4%