What does "risk-adjusted return" measure?

"Risk-adjusted return" is a financial metric that evaluates the potential return of an investment in relation to the amount of risk associated with that investment. The concept emphasizes the importance of considering both return and risk, rather than assessing returns in isolation. By measuring the amount of risk involved in achieving a return, risk-adjusted return helps investors make informed decisions that align with their risk tolerance and investment objectives.

This metric is particularly useful as it allows for comparisons between investments that may have the same return but differ significantly in risk levels. For instance, one investment might offer a high return but also come with a high degree of risk, while another could provide a similar return with much lower risk. By adjusting the returns based on the risks taken, investors can better assess which investments may offer more favorable outcomes for their specific circumstances.

The other options do not encapsulate the essence of "risk-adjusted return." The first option refers only to returns without any consideration of risk, which is not the focus of risk-adjusted measures. The third option relates to the total investment value needed to ensure growth, which is not relevant to evaluating the efficiency of returns in relation to risks. Lastly, the fourth option concerning variance in performance relative to benchmarks does not specifically address the relationship