Understanding the Sharpe Ratio

Risk-adjusted performance is a crucial concept in portfolio management that aims to evaluate investment returns in relation to the risk taken. One popular measure of risk-adjusted performance is the Sharpe Ratio, which assesses how much excess return is received for the extra volatility that an investment incurs. Understanding different measures of risk-adjusted performance is key for investors who seek to optimize their portfolios. Which of the following options correctly explains the concept of the Sharpe Ratio?