Risk adjusted return on capital
Imagine you have a piggy bank where you save your money. Let’s say you start with $10. Now, imagine you want to buy something that costs $20, like a cool toy. But, you don’t have enough money in your piggy bank, so you need to find a way to earn more money.
You decide to do some chores like washing the dishes, cleaning your room, and walking the dog, and after one week, you earn an extra $5. Now you have a total of $15 in your piggy bank.
Even though you earned more money, you still don’t have enough to buy the toy you want. This is where risk comes in.
Risk means that sometimes things may not go as planned, and you might not earn as much money as you expect. For example, let’s say you wanted to earn more money faster by selling lemonade, but it started raining, and no one wanted to buy your lemonade.
That’s where “risk-adjusted return” comes in. It means that you need to take the chance of something not going your way into account when you’re making financial decisions, like buying things or investing.
“Capital” means the amount of money you have in your piggy bank, and “return” means how much you will earn from how much money you invested.
So, to put it all together, risk-adjusted return on capital means that when you decide to use your money to invest or buy things, you need to think about how much risk is involved and how much you might earn in return for the amount of money you invested.
This way, you can make a better decision about what to do with your hard-earned money, just like how you work to save more money in your piggy bank.
You decide to do some chores like washing the dishes, cleaning your room, and walking the dog, and after one week, you earn an extra $5. Now you have a total of $15 in your piggy bank.
Even though you earned more money, you still don’t have enough to buy the toy you want. This is where risk comes in.
Risk means that sometimes things may not go as planned, and you might not earn as much money as you expect. For example, let’s say you wanted to earn more money faster by selling lemonade, but it started raining, and no one wanted to buy your lemonade.
That’s where “risk-adjusted return” comes in. It means that you need to take the chance of something not going your way into account when you’re making financial decisions, like buying things or investing.
“Capital” means the amount of money you have in your piggy bank, and “return” means how much you will earn from how much money you invested.
So, to put it all together, risk-adjusted return on capital means that when you decide to use your money to invest or buy things, you need to think about how much risk is involved and how much you might earn in return for the amount of money you invested.
This way, you can make a better decision about what to do with your hard-earned money, just like how you work to save more money in your piggy bank.
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