What is the primary goal of measuring relative risk?

Measuring relative risk primarily focuses on assessing an investment's performance in relation to a benchmark, such as a market index or a peer group. This approach allows investors and risk managers to evaluate how well an asset or portfolio performs when compared to a standard reference point. By analyzing relative risk, one can understand whether an investment is outperforming, underperforming, or aligning closely with market trends, thus providing insights into its risk-adjusted return.

Relative risk is essential for making informed investment decisions and for portfolio management strategies, as it incorporates both risk and return in the performance evaluation process. This comparative analysis is crucial for investors seeking to gauge their portfolio’s effectiveness and make adjustments based on performance metrics relative to the broader market or specific indices.