Understanding the Sharpe Ratio

In the world of portfolio management, performance evaluation is crucial for assessing the effectiveness of investment strategies. Among the various methods to gauge performance, risk-adjusted measures are particularly significant. These measures help investors understand how much return is earned for each unit of risk taken.

One commonly used risk-adjusted measure is the Sharpe Ratio. The Sharpe Ratio assesses the performance of an investment by adjusting for its risk. It is calculated by subtracting the risk-free rate from the investment's return and dividing the result by the investment's standard deviation. Higher values indicate better risk-adjusted performance.

Which of the following statements correctly describes the Sharpe Ratio?