NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
Which of the following is a measure of the risk-adjusted return of a portfolio that uses total risk, i.e. standard deviation, in the denominator?
The Sharpe ratio is the correct measure. It divides the portfolio's excess return over the risk-free rate by the standard deviation of returns, which represents total risk. The Treynor ratio instead divides by beta, which captures only systematic risk.
- ATreynor ratio
- BJensen's alpha
- CSharpe ratioCorrect
- DBeta
Explanation
Sharpe ratio = (portfolio return - risk-free rate) / standard deviation of portfolio returns, so it uses total risk. Treynor uses beta (systematic risk) as the denominator. Jensen's alpha is an excess return over the CAPM-required return, and beta is itself a risk measure, not a risk-adjusted return.
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