FYI: Because investors are, on average, risk averse, we should expect that there is a positive relation between expected returns and expected volatility—the greater the expected volatility, the greater the rate of return required. Conversely, we should expect to see a negative relationship between returns and unexpected volatility as investors increase the discount rate they use to value future expected earnings on risky assets.
We should also expect, during periods of heightened uncertainty, that investors, in a flight to safety, would be willing to accept lower required returns on safe assets.
The Sharpe ratio was developed to create a measure of risk-adjusted returns. It measures returns per unit of risk, with “risk” being defined as volatility. Importantly, the Sharpe ratio assumes returns are normally distributed, which is not always the case.
Regards,
Ted
https://www.etf.com/sections/index-investor-corner/swedroe-understanding-risk-return?nopaging=1
