What does 'relative risk' compare?

Relative risk specifically refers to the comparison of the risk associated with a particular investment to a benchmark or market average. This measure helps investors understand how much risk they are taking on relative to a standard, often represented by a market index or an expected performance standard. By comparing an investment's beta or volatility to that of a benchmark, investors can gauge whether the investment is riskier or less risky than the market average.

This concept is crucial in risk management as it enables investors to make informed decisions by understanding the context of their investment's risk level, especially when making comparisons among different assets or funds. The ability to assess relative risk allows for better-informed allocation of resources and due diligence in investment strategies. Thus, recognizing how an investment performs relative to a benchmark provides a clearer picture of its risk profile within the broader market.