CISI Professional Practice Exam 2025 – Complete Prep Guide

Risk-adjusted performance is essential for investors when evaluating benchmarks because it takes into account the level of risk associated with achieving a certain return. This type of performance provides a more nuanced view than absolute performance, which simply measures the return without considering the risks taken to achieve it.

Investors are often seeking to maximize their returns relative to the risks they are willing to accept. By considering risk-adjusted metrics, such as the Sharpe ratio or Treynor ratio, investors can assess how well a benchmark or an investment has performed relative to the amount of risk undertaken. This allows for better comparisons across different investments or portfolios, as it levels the playing field by accounting for variations in risk profiles.

In contrast, while absolute performance provides information about how much an investment has gained or lost, it does not inform investors about whether that performance was achieved through prudent risk management or reckless speculation. Similarly, geometric performance mainly focuses on the compound return over time, which is useful in some contexts but does not incorporate the risk factor. Historical performance may provide insights into past results but fails to consider whether those results can be replicated given current market conditions and risks.

Thus, risk-adjusted performance stands out as the most informative and meaningful type for investors aiming to make well-informed