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61 risk-adjusted return on capital
Finreturn on capital calculated in a way that takes into account the risks associated with income.EXAMPLEBeing able to compare a high-risk, potentially high-return investment with a low-risk, lower-return investment helps answer a key question that confronts every investor: is it worth the risk?There are several ways to calculate riskadjusted return. Each has its strengths and shortcomings. All require particular data, such as an investment’s rate of return, the risk-free return rate for a given period, and a market’s performance and its standard deviation.The choice of calculation depends on an investor’s focus: whether it is on upside gains or downside losses.Perhaps the most widely used is the Sharpe ratio. This measures the potential impact of return volatility on expected return and the amount of return earned per unit of risk. The higher a fund’s Sharpe ratio, the better its historical risk-adjusted performance, and the higher the number the greater the return per unit of risk. The formula is:(Portfolio return – Risk-free return)/Std deviation of portfolio return = Sharpe ratioTake, for example, two investments, one returning 54%, the other 26%. At first glance, the higher figure clearly looks like the better choice, but because of its high volatility it has a Sharpe ratio of 0.279, while the investment with a lower return has a ratio of 0.910. On a risk-adjusted basis the latter would be the wiser choice.The Treynor ratio also measures the excess of return per unit of risk. Its formula is:(Portfolio return – Risk-free return)/ Portfolio’s beta = Treynor ratioIn this formula (and others that follow), beta is a separately calculated figure that describes the tendency of an investment to respond to marketplace swings. The higher beta the greater the volatility, and vice versa.A third formula, Jensen’s measure, is often used to rate a money manager’s performance against a market index, and whether or not a investment’s risk was worth its reward. The formula is:(Portfolio return – Risk-free return) – Portfolio beta × (Benchmark return – Riskfree return) = Jensen’s measureThe ultimate business dictionary > risk-adjusted return on capital
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62 Carroll, Thomas
SUBJECT AREA: Agricultural and food technology[br]b. 1888 Melbourne, Victoria, Australiad. 22 February 1968 Australia[br]Australian engineer responsible for many innovations in combine-harvester design, and in particular associated with the Massey Harris No. 20 used in the "Harvest Brigade" during the Second World War.[br]Carroll worked first with the Buckeye Harvester Co., then with J.J.Mitchell \& Co. In 1911 he was hired by the Argentinian distributor for Massey Harris to help in the introduction of their new horse-drawn reaper-thresher. Carroll recommended modifications to suit Argentinian conditions, and these resulted in the production of a new model. In 1917 he joined the Toronto staff of Massey Harris as a product design leader, the No. 5 reaper-thresher being the first designed under him. Many significant new developments can be attributed to Carroll: welded sections, roller chains, oil-bath gears, antifriction ball bearings and the detachable cutting table allowing easy transfer of combines between fields were all innovations of which he was the source.In the 1930s he became Chief Engineer with responsibility for the design of a self-propelled harvester. The 20 SP was tested in Argentina only eight months after design work had begun, and it was to this machine that the name "combine harvester" was applied for the first time. Improvements to this original design produced a lighter 12 ft (3.65 m) cut machine which came off the production line in 1941. Three years later 500 of these machines were transported to the southern United States, and then gradually harvested their way northwards as the corn ripened. It has been estimated that the famous "Harvest Brigade" harvested over 1 million acres, putting 25 million bushels into store, with a saving in excess of 300,000 labour hours and half a million gallons of fuel.Carroll retired from Massey Ferguson in 1961.[br]Principal Honours and DistinctionsAmerican Society of Agricultural Engineers C.H. McCormick Gold Medal 1958.Bibliography1948, "Basic requirements in the design and development of the self propelled combine"Agricultural Engineer. 29(3), 101–5.Further ReadingG.Quick and W.Buchele, 1978, The Grain Harvesters, American Society of Agricultural Engineers (provides a detailed account of the development of the combine harvester).K.M.Coppick, 1972, gave an account of the wartime effort, which he mistakenly called "Massey Ferguson Harvest Brigade", presented to the Canadian Society forAgricultural Engineers, Paper 72–313.AP
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