On Risk Adjusted Returns

The notion of risk adjusted returns or economic value added has long been held as the economic correct way to evaluate opportunities in any business. While the details may be complex and hard to implement in practice, the effort to develop measurement systems that cut across risk (usually in the form of capital) and return (expected or historical) is essential to preventing the near sighted herd mentality that has pushed many financial institutions in the west to the brink. The whole fiasco of high levels of remuneration in institutions which have required extensive government funding, could have largely been avoided (at least ameliorated) if remuneration had been tied to long term risk adjusted returns, not simply to absolute profits.