Risk-adjusted return measures like Sharpe ratio, RAROC (Risk-Adjusted Return on Capital), and Sortino ratio normalize returns by volatility or downside risk, enabling meaningful comparison of investment or business unit performance. These metrics prevent reward for excessive risk-taking and support capital allocation to activities with superior risk-return profiles. For instance, two trading desks generating 15% returns appear equal until risk adjustment reveals one achieved it with half the volatility, indicating superior risk-adjusted performance and warranting additional capital allocation.