Understanding the Sharpe Ratio in Performance Appraisal

Easy Performance Evaluation Performance Appraisal

Alex is a portfolio manager who has been tasked with evaluating the performance of his investment fund over the past year. He has noted that the fund has outperformed its benchmark index by 3% but is trying to determine if this performance is consistent with acceptable risk levels. Alex decides to utilize the Sharpe Ratio as a measure of risk-adjusted performance.

Which of the following statements best describes the Sharpe Ratio and its application in performance appraisal?

The Sharpe Ratio measures the excess return per unit of total risk, making it useful for comparing non-diversified portfolios.

The Sharpe Ratio assesses the average performance of a portfolio compared to its benchmark, focusing solely on return.

The Sharpe Ratio is calculated by subtracting the risk-free rate from the portfolio return and dividing by the portfolio's standard deviation.

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