Understanding the Sharpe Ratio in Portfolio Comparison

In the context of portfolio management, several risk-adjusted performance measures are utilized to evaluate investment performance relative to the amount of risk taken. One of the common metrics used to assess this is the Sharpe Ratio. The Sharpe Ratio adjusts an investment’s return based on its risk, measuring the excess return earned per unit of risk. A higher Sharpe Ratio indicates a more favorable risk-return trade-off.

Given this information, which of the following statements best describes the significance of the Sharpe Ratio when comparing two different investment portfolios?