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What does the Sharpe ratio measure?

  1. A Total return only
  2. B Excess return per unit of total risk (standard deviation)
  3. C Return relative to a benchmark index
  4. D The correlation between two assets
Answer

Excess return per unit of total risk (standard deviation)

Sharpe ratio is (portfolio return minus risk-free rate) divided by standard deviation. A higher ratio means better risk-adjusted performance.

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