The Sharpe ratio is defined as A)(r_P − r_f)/σ_P_. B)(r_P − r_M)/σ_P_. C)(r_P − r_f)/β_P_. D)(r_P − r_M)/β_P_.

Question

Quizplus · Accepted Answer

The Sharpe ratio is calculated as the excess return generated by an investment per unit of volatility or total risk. It is calculated by subtracting the risk-free rate (f) from the expected return (r) and then dividing the result by the standard deviation (σ) of the investment's excess returns. Choice A fits this definition and is therefore the correct option.

The Sharpe Ratio Is Defined as