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What are risk-relative returns?

Risk-relative returns are a measure of the return on an investment relative to the amount of risk taken to achieve that return. They are used to compare the performance of different investments and to evaluate the risk-return tradeoff of an investment portfolio.

Risk-relative returns are calculated by dividing the return on an investment by a measure of the investment’s risk. The most common measure of risk used in the calculation of risk-relative returns is the standard deviation, which is a statistical measure of the amount of variation in an investment’s returns over time.

Risk-relative returns can be used to compare the performance of different investments. For example, if two investments have the same level of risk (as measured by their standard deviation), the investment with the higher risk-relative return is considered to be the better performer.

Risk-relative returns can also be used to evaluate the overall risk-return profile of an investment portfolio. In general, investors are looking for a portfolio with a high risk-relative return, which means that it provides a high level of return for a given level of risk.

Overall, risk-relative returns are a crucial concept in investing, as they help investors to understand the trade-off between risk and reward, and to make informed decisions about their investments.

“It is essential to wait for trades with a good risk/reward ratio. Patience is a virtue for a trader.” – Alexander Elder

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