Risk-Adjusted Returns

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Technical Indicators • Price Action • Chart Signals

performance per unit of risk taken

Risk-adjusted returns measure how much return an investment generates relative to the amount of risk taken. In crypto and traditional finance, this metric helps compare strategies not just by raw gains, but by efficiency, volatility, and downside protection. Tools like the Sharpe ratio, Sortino ratio, and maximum drawdown are commonly used to assess whether a high return justifies the risks taken to achieve it—especially in volatile, yield-driven, or speculative environments.

Use Case: Two yield farms offer 30% APY. Farm A has stable, consistent returns with little price movement; Farm B fluctuates wildly with weekly drawdowns. A risk-adjusted analysis shows Farm A provides a better return per unit of risk taken.

Key Concepts:

Sharpe Ratio — Compares excess return over the risk-free rate to volatility
Sortino Ratio — Focuses on downside risk instead of all volatility
Maximum Drawdown — Largest peak-to-trough loss during a period
Volatility Efficiency — Evaluating stable yield vs high-risk rewards
Sustainable Alpha — Long-term outperformance with managed risk
Speculative Alpha — High returns with proportionally high risk
Structural Alpha — Returns from systemic inefficiencies
Cycle-Resilient Strategies — Performance consistency across market phases
Investment Strategy — Framework for risk-return decisions
Opportunity Cost — Trade-offs between risk levels
Impermanent Loss — LP-specific risk affecting adjusted returns
DeFi Yield Models — Income structures with varying risk profiles
Cycle Awareness — Understanding risk across market phases
Market Phase Durability — Consistency through different conditions

Summary: Risk-adjusted returns give a more honest picture of performance by factoring in how wild or consistent the journey was—not just how high the number got. Essential for choosing between speculative, structural, or sustainable alpha strategies.

Metric	Focus	Interpretation	Usage Example
Sharpe Ratio	Total Volatility	Higher = Better per unit of risk	Comparing two staking yields
Sortino Ratio	Downside Volatility Only	More useful in risk-averse setups	Evaluating DeFi vaults with capital protection
Max Drawdown	Worst Historical Loss	Lower = Safer strategy	Comparing performance dips between farms

Why Risk-Adjusted Returns Matter

raw returns tell an incomplete story

Raw Returns Mislead
• 100% gain sounds great
• But what if 50% drawdown first?
• Could you hold through -50%?
• Did you have to be lucky?
• Was timing everything?
• Would you repeat that journey?

Risk-Adjusted Truth
• Accounts for volatility
• Measures efficiency of gains
• Compares apples to apples
• Reveals sustainable strategies
• Exposes fragile winners
• Guides smarter allocation

Example A
• Return: 50%
• Max Drawdown: 10%
• Volatility: Low
• Sharpe: 2.5
• Verdict: Excellent

Example B
• Return: 100%
• Max Drawdown: 60%
• Volatility: Extreme
• Sharpe: 0.8
• Verdict: Risky

Which Is Better?
• Example A wins
• More return per risk
• Survivable journey
• Repeatable process
• Sustainable strategy

The Principle: A 50% return with minimal drawdown is superior to a 100% return that required surviving a 60% crash. Risk-adjusted metrics reveal which strategies build wealth reliably versus which got lucky once.

Key Risk Metrics Explained

tools for evaluating performance quality

Metric	Formula Simplified	Good Value	What It Tells You
Sharpe Ratio	(Return – Risk-Free) / Volatility	> 1.0 (> 2.0 excellent)	Return per unit of total risk
Sortino Ratio	(Return – Target) / Downside Volatility	> 2.0 (> 3.0 excellent)	Return per unit of bad volatility
Max Drawdown	Peak to Trough % Loss	< 20% (< 10% conservative)	Worst case loss you’d experience
Calmar Ratio	Annual Return / Max Drawdown	> 1.0 (> 3.0 excellent)	Return relative to worst drop
Win Rate	Winning Trades / Total Trades	> 50% (context dependent)	How often you’re right

Crypto Context: Traditional “good” values assume low-volatility markets. In crypto, expect lower Sharpe ratios due to higher volatility. Focus on Sortino (downside-focused) and Max Drawdown for practical risk assessment.

Risk-Adjusted Returns by Strategy Type

comparing alpha sources on efficiency

Speculative Alpha
• Typical Return: -50% to +500%
• Max Drawdown: 80-100%
• Sharpe Ratio: Often negative
• Sortino: Poor
• Verdict: High return, terrible efficiency
• Most participants lose money

Structural Alpha
• Typical Return: 10-50%
• Max Drawdown: 20-40%
• Sharpe Ratio: 0.5-1.5
• Sortino: Moderate
• Verdict: Decent efficiency
• Requires skill and edge

Sustainable Alpha
• Typical Return: 5-20%
• Max Drawdown: 5-15%
• Sharpe Ratio: 1.5-3.0
• Sortino: Excellent
• Verdict: Best efficiency
• Kinesis exemplar

The Insight: Sustainable alpha from systems like Kinesis Holder’s Yield delivers superior risk-adjusted returns. Lower raw numbers, but dramatically better efficiency—and you can actually hold through the journey without panic selling.

Applying Risk Metrics to Crypto

adapting traditional tools for volatile markets

Crypto-Specific Challenges
• Extreme volatility (normal)
• 24/7 markets (no breaks)
• Short history (limited data)
• Regime changes (bull/bear extremes)
• Fat tails (black swans common)
• Correlation shifts (everything dumps together)

Adaptations Needed
• Use longer time frames
• Compare to crypto benchmarks (not S&P)
• Weight downside risk more heavily
• Account for smart contract risk
• Consider liquidity risk
• Factor in counterparty exposure

Best Metrics for Crypto
• Sortino Ratio — Downside focus
• Max Drawdown — Survivability
• Recovery Time — How long to heal
• Win Rate — Consistency

Less Useful in Crypto
• Sharpe — Volatility is normal
• Beta — Correlations unstable
• Standard Deviation — Upside is good
• VaR — Underestimates tails

Practical Approach
• Focus on max drawdown
• Compare to BTC/ETH
• Track over full cycles
• Prioritize Sortino
• Trust gut on survivability

Crypto Reality: Most crypto assets have negative Sharpe ratios over time. The survivors (BTC, ETH) barely break even on traditional risk-adjusted metrics. This makes sustainable alpha sources like Kinesis—with low volatility and consistent yield—exceptionally valuable.

Portfolio Risk Assessment Framework

evaluating your overall risk-adjusted position

Step 1: Calculate Position Risks
• List each holding
• Estimate max drawdown per asset
• Note correlation between positions
• Identify concentration risk
• Flag illiquid positions
• Assess smart contract exposure

Step 2: Stress Test Scenarios
• -50% crypto market crash
• -80% altcoin collapse
• Smart contract exploit
• Exchange failure
• Regulatory action
• Extended bear market (2+ years)

Low-Risk Foundation
• $KAG/$KAU
• Stablecoins
• BTC (long-term)
• Treasury-backed yield
• Max drawdown: ~20%

Moderate-Risk Growth
• ETH, quality L1s
• Liquid staking
• Revenue DeFi
• Fee-sharing protocols
• Max drawdown: ~50%

High-Risk Speculation
• Small-cap altcoins
• New protocols
• Leveraged positions
• Meme coins
• Max drawdown: ~95%

Target Allocation: A risk-adjusted portfolio might allocate 60%+ to low-risk foundations like Kinesis, 25-30% to moderate-risk growth, and 10-15% maximum to high-risk speculation. This structure limits portfolio max drawdown while maintaining upside.

Risk-Adjusted Decision Framework

choosing positions based on efficiency

Before Adding a Position
• What’s the realistic return?
• What’s the maximum loss possible?
• How long to recover from drawdown?
• Does it improve portfolio efficiency?
• Can I hold through worst case?
• Is the return worth the risk?

Red Flags (Poor Risk-Adjusted)
• “Can’t lose” mentality
• Unknown max drawdown
• No historical data
• Highly correlated to existing positions
• Illiquid exit paths
• Return relies on perfect timing

Position Sizing by Risk
• High Sharpe (>2): Up to 25%
• Moderate (1-2): Up to 15%
• Low (<1): Max 5%
• Negative: Avoid or speculate only

Rebalancing Triggers
• Position exceeds target %
• Risk metrics deteriorate
• Correlation increases
• Better opportunity found
• Life circumstances change

Exit Criteria
• Max drawdown exceeded
• Time horizon reached
• Risk-adjusted worsening
• Better efficiency available
• Strategy thesis broken

The Framework: Every position should earn its place based on risk-adjusted contribution. Kinesis Holder’s Yield earns large allocation due to excellent efficiency. Meme coins, if held at all, deserve tiny allocation due to terrible risk-adjusted metrics—despite potential raw returns.

Risk-Adjusted Returns Checklist

evaluating and optimizing your portfolio efficiency

Evaluating Positions
☐ Calculate or estimate Sharpe ratio
☐ Check Sortino (downside focus)
☐ Research maximum drawdown history
☐ Compare to benchmark (BTC/ETH)
☐ Assess recovery time from drawdowns
☐ Factor in all risks (smart contract, liquidity)

Portfolio Construction
☐ Target overall max drawdown
☐ Balance risk across positions
☐ Include low-correlation assets
☐ Size positions by risk-adjusted quality
☐ Maintain rebalancing discipline
☐ Document target allocations

Optimization
☐ Prioritize high Sharpe/Sortino
☐ Reduce low-efficiency positions
☐ Add uncorrelated yield sources
☐ $KAG/$KAU for efficient foundation
☐ Review quarterly at minimum
☐ Adapt to life circumstances

Security Foundation
☐ Self-custody primary holdings
☐ Tangem for mobile access
☐ Ledger for cold storage
☐ Diversify custody methods
☐ Reduce counterparty risk
☐ Security is risk-adjusted too

The Principle: Risk-adjusted returns are the honest measure of investment skill. A 10% return with minimal drawdown beats a 100% return that required surviving a 70% crash. Build your portfolio around efficiency, not excitement. Kinesis exemplifies this—modest yield, excellent risk-adjusted performance.

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