The major criticism of the Sharpe index is that it relies on:

A) the CML
B) the risk premium per unit
C) an efficiency measure
D) standard deviation

Question

The major criticism of the Sharpe index is that it relies on:

A) the CML
B) the risk premium per unit
C) an efficiency measure
D) standard deviation

Quizplus · Accepted Answer

As the Sharpe index does not rely on an asset pricing model,and as standard deviation is more easily understood than other risk concepts,such as beta,the Sharpe index is often quoted.The measure captures jointly aspects of return and risk.Hence,it allows for investments of varying risk to be assessed on a comparative basis.Critics of the Sharpe index argue that it is reliant on the capital market line,which is based on unrealistic assumptions that do not hold in practice.Again,the measure equally weights superior and inferior performance.Further,the measure of risk may be inappropriate for many types of funds,such as superannuation funds.For instance,Prowse and Knox (1989)argue that the Sharpe index should not be used to assess superannuation performance.However,Sharpe (1994)has defended the measure.

The Major Criticism of the Sharpe Index Is That It