The Sharpe Ratio is considered to be a good measure for well diversified portfolios because:
A) The most of the total risk in the portfolio is systemic risk
B) The beta estimate is unambiguous.
C) It used by mutual fund managers.
D) Unsystemic risk is of little worry in correctly diversified portfolios.
E) Well diversified portfolios have a high R-Squared correlation.

Question

Quizplus · Accepted Answer

The Sharpe Ratio takes into account the relationship between total risk and the excess return earned by the portfolio, which is considered a better measure of risk-adjusted performance. Well-diversified portfolios would have a lower unsystemic risk, which is idiosyncratic to individual stocks within the portfolio, and higher systemic risk, which is inherent in the entire market. Therefore, the Sharpe Ratio is a good measure for assessing how effectively the portfolio manager is leveraging market risk to generate returns.

The Sharpe Ratio Is Considered to Be a Good Measure