NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
Which measure divides a portfolio's excess return over the risk-free rate by the portfolio's standard deviation?
This is the Sharpe ratio. It measures excess return over the risk-free rate per unit of total risk, with total risk represented by the standard deviation of portfolio returns. Treynor uses beta instead, so it captures only systematic risk.
- ATreynor ratio
- BSharpe ratioCorrect
- CJensen's alpha
- DInformation ratio
Explanation
The Sharpe ratio equals (Rp - Rf) / standard deviation, so it uses total risk. The Treynor ratio uses beta as the denominator. Jensen's alpha is a return difference from CAPM, not a ratio, and the information ratio uses tracking error.
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