Risk-Return Plot Definition, Overview and Quiz

1. Define - Define a Risk-Return Plot and its uses.
2. Context - Use it in a sentence.
3. Quiz - Test yourself.

by Paul Alan Davis, CFA

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Using a Risk-Return Plot for Financial Modeling

Beginner

A Risk-Return Plot is a graph depicting portfolio or stock risk on the x-axis and return on the y-axis. These scatterplots are used to explain portfolio selection from Modern Portfolio Theory, and when analyzing past performance.

It is common to measure risk and return for the past, and for the future time period using estimates. When creating the chart in Excel, select the XY Scatter chart type.

Synonym: investment scatterplot, risk and return chart, risk return graph, risk vs return graph

For context, imagine making a presentation to the board of directors about competing mutual funds. Likely the fastest way to relay this is by using a Risk-Return Chart with past returns over each of several periods. For example 1-year, 3-years, and 5-years, with average annual returns and risk.

This will quickly compare the track record on a risk-adjusted basis, which is most important to institutional investors.

In a Sentence

Doc:  Which of the three timeframes provides a more logical risk-return plot?
Mia:  I think forecast because it is less impacted by outliers.

Video

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Video Script

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Quiz

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Quetions or Comments?

Still unclear on the risk-return plot and all of the relationships it shows in financial modeling? Try out the course Quant 101, a free 27-video series on financial modeling of stock portfolio risk and stats in Excel.

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