{"id":10954,"date":"2025-06-23T11:38:26","date_gmt":"2025-06-23T11:38:26","guid":{"rendered":"https:\/\/navia.co.in\/blog\/?p=10954"},"modified":"2025-08-12T06:46:12","modified_gmt":"2025-08-12T06:46:12","slug":"a-simple-guide-to-risk-adjusted-returns","status":"publish","type":"post","link":"https:\/\/navia.co.in\/blog\/a-simple-guide-to-risk-adjusted-returns\/","title":{"rendered":"Return is Easy, But What About Risk? A Simple Guide to Risk-Adjusted Returns (with a 7% Risk-Free Rate)"},"content":{"rendered":"\n<div class=\"wp-block-rank-math-toc-block\" id=\"rank-math-toc\"><nav><ul><li class=\"\"><a href=\"#what-is-risk-in-investing\">What is Risk in Investing?<\/a><\/li><li class=\"\"><a href=\"#mutual-fund-comparison-risk-free-rate-7\">Mutual Fund Comparison (Risk-Free Rate = 7%)<\/a><\/li><li class=\"\"><a href=\"#options-vs-et-fs-using-sharpe-with-7-risk-free\">Options Vs ETFs (Using Sharpe with 7% Risk-Free)<\/a><\/li><li class=\"\"><a href=\"#why-risk-adjusted-return-matters\">Why Risk-Adjusted Return Matters?<\/a><\/li><li class=\"\"><a href=\"#sharpe-ratio-formula-refresher\">Sharpe Ratio Formula Refresher<\/a><\/li><li class=\"\"><a href=\"#bottom-line\">Bottom Line<\/a><\/li><\/ul><\/nav><\/div>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-6a5912f33a2bdf867e9484411b9e8ff5\" id=\"what-is-risk-in-investing\" style=\"color:#023368\">What is Risk in Investing?<\/h2>\n\n\n\n<p>Risk is the <strong>volatility<\/strong> or <strong>uncertainty<\/strong> in your investment&#8217;s returns. Even if two <a href=\"https:\/\/navia.co.in\/blog\/category\/ipo-investments\/\">stocks<\/a> give the same average return, one might be much bumpier than the other. The <strong>bumpier<\/strong> one is riskier.<\/p>\n\n\n\n<p>We use <strong>Standard Deviation<\/strong> to measure how much returns fluctuate. The more it jumps around, the higher the risk.<\/p>\n\n\n\n<p><strong>Example: Stock A vs Stock B (with Risk-Free Rate = 7%)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Investments<\/strong><\/td><td><strong>Avg Annual Returns<\/strong><\/td><td><strong>Std. Dev (Risk)<\/strong><\/td><td><strong>Sharpe Ratio<\/strong><\/td><\/tr><tr><td><strong>Stock A<\/strong><\/td><td>12%<\/td><td>10%<\/td><td>(12%-7%) \u00f7 10% = <strong>0.50<\/strong><\/td><\/tr><tr><td><strong>Stock B<\/strong><\/td><td>15%<\/td><td>20%<\/td><td>(15%-7%) \u00f7 20% = <strong>0.40<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Even though Stock B gave a higher return, <strong>Stock A is more efficient<\/strong> \u2014 it generated more return per unit of risk.<\/p>\n\n\n\n<iframe class=\"custom-video\" src=\"https:\/\/www.youtube.com\/embed\/75khF0-dW-E?si=pBlqEfnc0ImOogqb\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-16018d1d wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link has-white-color has-text-color has-background has-link-color wp-element-button\" href=\"https:\/\/navia.co.in\/app.html\" style=\"background-color:#ec4d37\"><strong>Get Navia APP<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-428f14edb46fe5a33cf9b30d54edf2cf\" id=\"mutual-fund-comparison-risk-free-rate-7\" style=\"color:#023368\">Mutual Fund Comparison (Risk-Free Rate = 7%)<\/h2>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Mutual Funds<\/strong><\/td><td><strong>5Y CAGR<\/strong><\/td><td><strong>Std Dev<\/strong><\/td><td><strong>Sharpe Ratio<\/strong><\/td><\/tr><tr><td>Fund X<\/td><td>10%<\/td><td>8%<\/td><td>(10%-7%) \u00f7 8% = <strong>0.375<\/strong><\/td><\/tr><tr><td>Fund Y<\/td><td>12%<\/td><td>15%<\/td><td>(12%-7%) \u00f7 15% = <strong>0.33<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Fund X might be more \u201cboring,\u201d but it&#8217;s <strong>better adjusted for risk<\/strong>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-919414780dc9f3acf97f1719bf8a9072\" id=\"options-vs-et-fs-using-sharpe-with-7-risk-free\" style=\"color:#023368\">Options Vs ETFs (Using Sharpe with 7% Risk-Free)<\/h2>\n\n\n\n<p>Let\u2019s say:<\/p>\n\n\n\n<p>\ud83e\udc16 Nifty <a href=\"https:\/\/navia.co.in\/blog\/category\/etf-strategies\/\">ETF<\/a> gives a <strong>10%<\/strong> return, risk (std dev) <strong>7%<\/strong><\/p>\n\n\n\n<p>\ud83e\udc16 Nifty <a href=\"https:\/\/navia.co.in\/blog\/what-is-a-call-option-in-the-share-market\/\">Call Option<\/a> gives a <strong>30%<\/strong> return, risk (std dev) <strong>35%<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Investments<\/strong><\/td><td><strong>Returns<\/strong><\/td><td><strong>Std Dev<\/strong><\/td><td><strong>Sharpe Ratio<\/strong><\/td><\/tr><tr><td>Nifty ETF<\/td><td>10%<\/td><td>7%<\/td><td>(10%-7%) \u00f7 7% = <strong>0.43<\/strong><\/td><\/tr><tr><td>Nifty Option<\/td><td>30%<\/td><td>35%<\/td><td>(30%-7%) \u00f7 35% = <strong>0.66<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>This time, the option appears better on a risk-adjusted basis<\/strong> \u2014 but it comes with higher capital loss risk and requires skill. That\u2019s why <strong>Sharpe ratio must be interpreted carefully<\/strong>, especially in derivatives.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><a href=\"https:\/\/open.navia.co.in\/index-navia.php\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1024\" height=\"149\" src=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/03\/OPEN-DEMAT-ACC.png\" alt=\"returns\n\" class=\"wp-image-9412\" srcset=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/03\/OPEN-DEMAT-ACC.png 1024w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/03\/OPEN-DEMAT-ACC-300x44.png 300w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/03\/OPEN-DEMAT-ACC-150x22.png 150w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/03\/OPEN-DEMAT-ACC-768x112.png 768w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-3a049446c4bcb4454514eef02af1d80b\" id=\"why-risk-adjusted-return-matters\" style=\"color:#023368\">Why Risk-Adjusted Return Matters?<\/h2>\n\n\n\n<p>Imagine these two funds:<\/p>\n\n\n\n<p>\ud83e\udc16 Fund A: 15% return with low volatility \u2192 more peace of mind<\/p>\n\n\n\n<p>\ud83e\udc16 Fund B: 17% return with wild swings \u2192 stressful and riskier<\/p>\n\n\n\n<p>Sharpe Ratio helps you pick <strong>quality over flash<\/strong> \u2014 consistent, predictable performers over wild returns.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-d3eb6d4853208be19da6c22f0cc9c11c\" id=\"sharpe-ratio-formula-refresher\" style=\"color:#023368\">Sharpe Ratio Formula Refresher<\/h2>\n\n\n\n<figure class=\"wp-block-image size-full is-resized\"><img decoding=\"async\" width=\"613\" height=\"91\" src=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/06\/WhatsApp-Image-2025-06-23-at-11.36.19-1.jpeg\" alt=\"returns\n\" class=\"wp-image-10965\" style=\"width:731px;height:auto\" srcset=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/06\/WhatsApp-Image-2025-06-23-at-11.36.19-1.jpeg 613w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/06\/WhatsApp-Image-2025-06-23-at-11.36.19-1-300x45.jpeg 300w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/06\/WhatsApp-Image-2025-06-23-at-11.36.19-1-150x22.jpeg 150w\" sizes=\"(max-width: 613px) 100vw, 613px\" \/><\/figure>\n\n\n\n<p>In our examples, <strong>we used 7% as the risk-free rate <\/strong>\u2014 similar to an Indian 1-year FD.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-9c757972bff8a99b51a655ba43185f4f\" id=\"bottom-line\" style=\"color:#023368\">Bottom Line<\/h2>\n\n\n\n<p>\ud83e\udc16 A high return means little unless you know <strong>how much risk<\/strong> was taken to earn it<\/p>\n\n\n\n<p>\ud83e\udc16 Use <strong>Sharpe Ratio <\/strong>to compare <a href=\"https:\/\/navia.co.in\/blog\/category\/investments\/\">investments<\/a> more meaningfully<\/p>\n\n\n\n<p>\ud83e\udc16 Look at this metric for <strong>mutual funds, stocks<\/strong>, and even <strong>derivatives<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>Do You Find This Interesting?<\/strong><\/p>\n\n\n\n<div class=\"wp-block-group is-nowrap is-layout-flex wp-container-core-group-is-layout-ad2f72ca wp-block-group-is-layout-flex\">\n<p>We\u2019d Love to Hear from you-<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><a href=\"https:\/\/form.typeform.com\/to\/bpQ8ZlDc\"><img decoding=\"async\" width=\"300\" height=\"64\" src=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/02\/Yes-No-Button-1.png\" alt=\"feedback yes or no button\" class=\"wp-image-8901\" srcset=\"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/02\/Yes-No-Button-1.png 300w, https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/02\/Yes-No-Button-1-150x32.png 150w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a><\/figure>\n<\/div>\n\n\n\n<p><strong>DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is Risk in Investing? Risk is the volatility or uncertainty in your investment&#8217;s returns. Even if two stocks give the same average return, one might be much bumpier than the other. The bumpier one is riskier. We use Standard Deviation to measure how much returns fluctuate. The more it jumps around, the higher the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":10975,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[11,7,21,22,53,424,32],"class_list":["post-10954","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investments","tag-financial-goals","tag-indian-stock-markets","tag-investments","tag-investor","tag-marketperformance","tag-risk-adjusted-returns","tag-wealth-creation"],"featured_image_src":"https:\/\/navia.co.in\/blog\/wp-content\/uploads\/2025\/06\/A-Simple-Guide-to-Risk-Adjusted-Returns-with-a-7-Risk-Free-Rate.png","author_info":{"display_name":"Navia Markets","author_link":"https:\/\/navia.co.in\/blog\/author\/tradeplusonline\/"},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/posts\/10954","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/comments?post=10954"}],"version-history":[{"count":29,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/posts\/10954\/revisions"}],"predecessor-version":[{"id":12283,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/posts\/10954\/revisions\/12283"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/media\/10975"}],"wp:attachment":[{"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/media?parent=10954"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/categories?post=10954"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/navia.co.in\/blog\/wp-json\/wp\/v2\/tags?post=10954"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}