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

Accounting May 21, 2021

Expert Solution

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.

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