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Homework answers / question archive / The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures? A) Treynor ratio B) Value-at-Risk C) Sharpe ratio D) Jensen's alpha E) raw return
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures? A) Treynor ratio B) Value-at-Risk C) Sharpe ratio D) Jensen's alpha E) raw return
Answer
C )
Explanation
The correct option is C "Sharpe Ratio".
The formula to calculate Sharpe Ratio is as follows:
S(x) = (rx?−Rf?)?/StdDev(rx?)
Here,
x=Investment
rx?= Return of Portfolio
xRf?= Risk-free Rate
StdDev(rx?)= Standard deviation of rx??
Subtract the risk-free rate from the return of the portfolio. Divide the result by the standard deviation of the portfolio's excess return. A high Sharpe ratio is good when compared to similar portfolios or funds with lower returns.
