Is a risk adjusted return a sharpe ratio or the rfr+ B [E(rmkt)-rfr] CAPM equation? I keep bumping into this during my revision, but forget where I read the explanation for the term. Any help would be appreciated… Thanks!
Sharpe Ratio is risk adjusted return. E®- risk free rate/std. deviation. the CAPM equation adds a “risk premium” to the security (E®-rfr)
The Sharp Ratio measures excess return per unit of risk. The risk adjust return implied the CAPM, it’s explained in the section of the semi-strong form of the efficient theory, when many research use it in testing the abnormal return which result from using public information. We use the word “risk adjusted” because the excess return of each stock or portfolio (= E® - RFR) is adjusted for the volatility of that stock or portfolio in moving with the market (beta).