Risk-adjusted return measure tells you how much a high risk fund would
have earned if it has assumed a lower risk level, and how much a lower
risk fund would have earned if it has assumed a higher risk level. By
comparing funds using this key indicator, you can identify the most
efficient funds within each category.
We calculate RAR in two steps: First, we adjust the fund’s risk to a level
comparable to that of its respective benchmark index. Then, we calculate
the rate of return that the fund would have posted under that assumption.
In other words, RAR gives us the rate of return that the fund manager
would have obtained, had he/she been prepared to assume the same risk
level as the index.