CISI Professional Practice Exam 2025 – Complete Prep Guide

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What does "risk-adjusted return" measure?

The return of an investment relative to its market position

The performance of an investment relative to the risk taken

Risk-adjusted return measures the performance of an investment relative to the risk taken to achieve that performance. This metric is crucial for understanding how much return is earned for each unit of risk assumed, allowing investors to determine whether they are being adequately compensated for the risks they take.

When comparing investments, simply looking at the total return does not provide a complete picture, as higher returns can come with significantly higher risks. Risk-adjusted return metrics, such as the Sharpe ratio or the Treynor ratio, help investors make more informed decisions by considering both the returns and the inherent risks involved in an investment. This approach allows for better comparisons between different investments or portfolios that may have varying levels of risk exposure.

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The total return of all investments combined

The volatility of an investment over time

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