Risk Adjusted Performance Measurement – What is It and Why is It Important?
If you are new to the stock exchange scene, then you might not have heard of the risk adjusted performance measurement. Furthermore, even if you have heard of it, you probably have no idea what it means. It may seem complicated, but really all risk adjusted performance measurement is is the way in which mutual funds are compared and evaluated. The formula is simple: take the performance of the mutual fund and factor in the risk level of the stocks that the fund is invested in.
Now that you know what the risk adjusted performance measurement is, you need to know why it is important. In case the definition did not demonstrate to you the importance of the risk adjusted performance measurement, here it is in a nutshell: If you do not weigh the risks of the stocks you invest in, you could end up taking a big fall on your investment. That means that, if you invest in a high-risk stock, you could end up losing all or most of your money. This is not a good thing. So you should always look at the amount of risk involved in a stock you are thinking of putting any of your money in, no matter how much money it is.
Usually, as the investor, you will not have to worry about computing the risk adjusted performance measurement yourself. That is what your stockbroker or trader is for. When you go in to make your stock selections, the broker should have the risk adjusted performance measurement for each stock already available for you to look at. Of course, since the stock market changes almost on an every minute basis, this information can change at the drop of a hat. However, unless drastic rises or falls happen with a stock, it should remain steady as to whether or not it is a high risk investment.
It really cannot be stressed enough how important it is for you to consider the risk adjusted performance measurement when you are making the decision on what stocks to invest your money in. Unless you just have money to burn, you really should not invest in high risk stocks. Sure, there is a chance that everything will turn out okay and you will at least make some sort of profit, but it is just too risky. When it comes to money, especially in this economy, you need to go with safer bets for your investment. At least that way you can be sure of getting at least a small return on your investment.