Advanced Financial Management (AFM)Question 5830 of 10

In portfolio management, Sharpe Ratio measures excess return per unit of:

Options

ASystematic risk (Beta).

BTotal risk (Standard deviation

\displaystyle \sigma

).

CUnsystematic risk.

DDownside semi-variance only.

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Correct Answer

✅ Option B — Total risk (Standard deviation $\displaystyle \sigma$ ).

All Options:

ASystematic risk (Beta).
BTotal risk (Standard deviation $\displaystyle \sigma$ ). ✓
CUnsystematic risk.
DDownside semi-variance only.

Detailed Solution & Explanation

Correct Answer: Option **B** Explanation: Sharpe Ratio evaluates total risk:

\text{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}

Where

\displaystyle \sigma_p

is the portfolio standard deviation (total risk). Conversely, Treynor Ratio measures excess return per unit of systematic risk (Beta).

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