Measuring Return and Risk

Abstract

In evaluating performance of an asset manager, an investment strategy, or an investment vehicle, the first step is to calculate the actual return realized. Several methodologies for computing the actual return are explained in this chapter. Performance evaluation must take into account the risks associated with any investment. Although we described the various types of risks in Chapter 2, in this chapter we will explain and illustrate several measures to quantify risk. A more detailed discussion of how these risk measures are calculated is provided in Chapter 8 of the companion book. Reward-risk ratios combine return (or reward) from an investment relative to its risk. Four reward-risk ratios are described at the end of this chapter.