Risk Adjusted Return Calculator

The Risk Adjusted Return calculator helps you measure investment return compared with the risk taken to earn it. A simple return percentage does not show how much volatility an investment had. A risk adjusted return calculation adds risk to the analysis.

We developed this calculator so users can easily calculate Risk Adjusted Return using the Sharpe ratio. It can work with a known portfolio return, risk-free rate, and standard deviation. It can also calculate the result from a series of periodic returns.

The Sharpe Ratio

The Sharpe ratio is a widely used risk-adjusted performance measure. It compares excess return with the standard deviation of returns.

Risk Adjusted Return Formula

The core risk adjusted return formula used by this calculator is:

Risk Adjusted Return = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation

The excess return formula is:

Excess Return = Portfolio Return − Risk-Free Rate

Here, portfolio return is the investment return, the risk-free rate is the return available from a low-risk reference investment, and standard deviation measures return volatility.

For example, if portfolio return is 12%, the risk-free rate is 4%, and standard deviation is 16%:

Excess Return = 12% − 4% = 8%

Risk Adjusted Return = 8% ÷ 16% = 0.50

So, the calculated Sharpe ratio is 0.5000.

How to Use Online Risk Adjusted Return Calculator

1. Choose the calculation method.

Select the known-value method when you already know the portfolio return and standard deviation. Select the return-series method when you have several periodic returns.

2. Enter the portfolio return.

For the known method, enter the investment return as a percentage.

3. Enter the risk-free rate.

Use a risk-free rate that matches the return period.

4. Enter the risk information.

For the known method, enter standard deviation. For the return-series method, enter at least two periodic returns. The calculator finds their average and sample standard deviation.

5. Calculate the result.

The calculator subtracts the risk-free rate from the return and divides the excess return by standard deviation. It then displays the excess return, standard deviation, Sharpe ratio, and result rating.

Example Risk Adjusted Return Calculation

Suppose an investment has five periodic returns of 10%, 15%, 8%, 12%, and 5%. The risk-free rate is 4%.

First, calculate the average return:

Average Return = (10 + 15 + 8 + 12 + 5) ÷ 5 = 10%

The calculator then uses sample standard deviation:

Sample Standard Deviation = √[Σ(Return − Average Return)² ÷ (n − 1)]

For these returns:

Sample Standard Deviation = 3.8079%

Next:

Excess Return = 10% − 4% = 6%

Risk Adjusted Return = 6% ÷ 3.8079% = 1.5755

The calculator therefore produces a Sharpe ratio of 1.5755.

Final Verdict

A Risk Adjusted Return calculator gives a clearer view of investment performance by considering both return and volatility. The core Sharpe ratio measures excess return per unit of total risk.

The calculator rates results below 0 as Negative, 0 to below 1 as Sub-Optimal, 1 to below 2 as Good, 2 to below 3 as Very Good, and 3 or higher as Excellent. These labels are the calculator's built-in display system, not universal investment standards.

Risk adjusted return is useful for comparing investments, but the Sharpe ratio should be used with consistent time periods and appropriate return data. CFA Institute also notes that different risk-adjusted measures, such as the Treynor and Sortino ratios, use different definitions of risk.

FAQs

What is risk adjusted return?

Risk adjusted return measures investment return in relation to the risk taken to achieve that return. The Sharpe ratio is a common method.

What is the risk adjusted return formula?

Risk Adjusted Return = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation.

What is a good risk adjusted return?

There is no universal cutoff that applies to every investment. This calculator uses its own result labels based on the calculated Sharpe ratio.

Is risk adjusted return the same as RAROC?

No. Risk Adjusted Return on Capital (RAROC) is a different financial performance measure. It relates risk-adjusted income to economic or risk-adjusted capital. The calculator described here uses the Sharpe ratio, not RAROC.

Can I calculate risk adjusted return in Excel?

Yes. If you have portfolio return, risk-free rate, and standard deviation, the core calculation is:

=(Portfolio Return - Risk Free Rate) / Standard Deviation

For a return series, you first calculate the average return and sample standard deviation, then apply the Sharpe ratio formula.