If you invested CNY100 in Kweichow Moutai (600519 SH) in January 2014, you would have more than CNY400 by now. If you invested CNY100 in China Communications Construction (601800 SH) in January 2014, you would have more than CNY400 by now as well.
Which stock would you prefer to have held?
Both these stocks returned about the same, more than 300% in the past 3.5 years. The stocks had very different paths, but they both ended up yielding the same price return.
How to get one number to be able to compare?
Dividing the annualized return by the annualized standard deviation gives us the risk-adjusted return.
Kweichow Moutai (600519 SH) gave you 1.7% return per unit of risk, while China Communications Construction (601800 SH) only gave you 1.0% return per unit of risk.
A smoother ride is preferred
If you would have held either of the stocks for the exact time period shown in the chart below you should’ve been indifferent.
In reality, we’re emotional creatures. When share prices go up/down we feel great/pain and this affects our decision making. While volatility might matter less, in the long run, a smoother ride is usually preferred.
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