Understanding the Sharpe Ratio

Very Easy Performance Evaluation Performance Appraisal

In evaluating the performance of a mutual fund over a given period, investors often look at various performance metrics. One important metric is the Sharpe Ratio. The Sharpe Ratio measures the excess return per unit of risk, which helps investors understand how well a fund compensates them for the risk undertaken.

Given this context, which of the following statements most accurately describes the Sharpe Ratio?

It measures the total return of the fund relative to the returns of a benchmark.

It assesses the risk-adjusted performance of a fund by comparing its excess returns to its standard deviation.

It indicates how frequently a fund outperforms the market.

Hint

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