How may realized returns be adjusted for risk so investment performance may be judged on risk-adjusted basis?

Can anyone help? I'm stuck on this question.

Hmmmm.....thats not an easy question.

There are a lot of different ways to adjust annual returns to risk adjusted returns, but, truthfully, my MBA classes were a long time ago so I cant remember them in too much detail, haha.

There are likely some excel spreadsheets floating around the Web that can adjust returns for risk if you search for them.

Otherwise, and this is very simplistic, you could drop the returns into Excel and statistically normalize them to calculate a mean reurn and standard deviation. That will at least identify the outliers to you.

You take the standard deviation of the monthly returns and then annualize it to calculate the volatility. Then you correlate those monthly returns with the overall stock market returns to create a beta, and calculate the outperformance to create alpha. Make sure you compare equivalent indexes - if your investment is a small-cap stock, compare it to the small-cap index.

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