What is absolute vs. risk-adjusted performance?

Absolute performance measures an investment’s overall return, regardless of the market conditions that may or may not have affected it.

For example, a stock may gain 15% in a year, regardless of market fluctuations.

On the contrary, risk-adjusted performance factors in the level of risk taken to achieve returns. The risk-adjusted performance considers volatility to help investors gauge how efficiently an investment generates returns relative to the associated risks.

For example, a portfolio that achieves a 12% return with lower volatility compared to the market is considered to have a higher risk-adjusted performance, which may suggest superior risk management strategies.