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Relationship

Risk-return scatterplot

Compares investments using a defined risk measure and return measure.

  • Plot
  • Relationship
  • Investment comparison

What it answers

What return accompanies each risk level?

Shape
Risk and return points
What it shows
Risk-return trade-offs.

Example

The question

Which funds paid off for the risk they took?

Funds by volatility and return, last 3 years (% per year)

Funds by volatility and return, last 3 years (% per year)One dot per fund. Points above the dashed line paid more for each unit of risk. Bond: volatility 3%, return 2.5%; Balanced: volatility 8%, return 5.2%; Nordic: volatility 15%, return 9.1%; Global: volatility 13%, return 10.4%; Tech: volatility 24%, return 12.0%; Small cap: volatility 21%, return 6.5%; Property: volatility 17%, return 3.8%.Return (% per year)024681012140102030Volatility (% per year)BondBalancedNordicGlobalTechSmall capProperty
Funds by volatility and return, last 3 years (% per year)One dot per fund. Points above the dashed line paid more for each unit of risk. Bond: volatility 3%, return 2.5%; Balanced: volatility 8%, return 5.2%; Nordic: volatility 15%, return 9.1%; Global: volatility 13%, return 10.4%; Tech: volatility 24%, return 12.0%; Small cap: volatility 21%, return 6.5%; Property: volatility 17%, return 3.8%.Return (% per year)024681012140102030Volatility (% per year)BondBalancedNordicGlobalTechSmall capProperty
One dot per fund. Points above the dashed line paid more for each unit of risk. Bond: volatility 3%, return 2.5%; Balanced: volatility 8%, return 5.2%; Nordic: volatility 15%, return 9.1%; Global: volatility 13%, return 10.4%; Tech: volatility 24%, return 12.0%; Small cap: volatility 21%, return 6.5%; Property: volatility 17%, return 3.8%.

Illustrative data. It belongs to no company.

When to use it

Use it when

Comparing investments on aligned risk/return definitions.

Avoid it when

Different horizons, return conventions or hidden risk definitions.

How to read it

Read the stated risk axis and return axis together.

Note

Align horizons and specify both calculations.

The data you need

Layout
Long table
Fields
Investment: text; Risk: number; Return: number
One row is
One investment with aligned risk and return estimates. What is the grain?
Rules
Specify horizon, frequency, annualisation and risk measure. Keep returns as numeric fractions if percentage-formatted.
Optional
Optional size, benchmark or asset class.
Preparation
Validate the input grain and missing values. Specify horizon, frequency, annualisation and risk measure. Keep returns as numeric fractions if percentage-formatted.
Units
Risk and return units must be defined and horizon-aligned; annualised volatility and annual return are different statistics.
Example of the input layout: Long tableA long table: one row per observation, few columns. New data adds rows.InvestmentRiskReturnAABBC
A long table: one row per observation, few columns. New data adds rows.

Worked example

A risk 10%, return 7%; B risk 18%, return 11%. B offers 4 percentage points more measured return with 8 points more measured risk.

InvestmentRiskReturn
A0.100.07
B0.180.11
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