The Sharpe ratio

Question

The Sharpe ratio

BlackTom AI · Accepted Answer

Question: The Sharpe ratio
Question type: multiple_choice
Answer options:
- measures the systematic (market) risk
- measures the idiosyncratic (individual) stock risk
- measures the marginal return for risk
- measures the marginal propensity to consume
- measures risk of a portfolio

Option 1: measures the systematic (market) risk. This is not what the Sharpe ratio measures. Systematic risk is typically associated with beta and market-related risk, whereas the Sharpe ratio focuses on risk-adjusted return, not only market risk. Therefore this option describes a concept more aligned with beta or CAPM, not Sharpe.

Option 2: measures the idiosyncratic (individual) stock risk. Idiosyncratic risk relates to company-specific factors and diversifiable risk. The Sharpe ratio considers total risk (standard deviation) in the denominator, not isolating idiosyncratic risk specifically, so this option is inaccurate as its primary interpretation.

Option 3: measures the marginal return for risk. The Sharpe ratio is defined as (portfolio return − risk-free rate) / standard deviation of portfolio return, i.e., risk-adjusted return. It captures how much excess return is earned per unit of total risk, which aligns with the idea of marginal return for risk. This option correctly identifies the essence of Sharpe.

Option 4: measures the marginal propensity to consume. This term comes from macroeconomics and GDP models, describing how consumption changes with income. It has no relationship to the Sharpe ratio or investment performance, so this option is clearly incorrect.

Option 5: measures risk of a portfolio. While the Sharpe ratio involves portfolio risk (through standard deviation in the denominator), its primary interpretation is not merely measuring risk level; it measures risk-adjusted return. So this option is incomplete and misleading as a full description of the Sharpe ratio.

Summary: Among the options, the statement that best describes the Sharpe ratio is that it measures the marginal return for risk, reflecting risk-adjusted performance by relating excess return to total risk. The other choices mix concepts like systematic vs. idiosyncratic risk, macroeconomic consumption, or only portfolio risk, which do not capture the Sharpe ratio’s intended meaning.

The Sharpe ratio

查看解析

登录即可查看完整答案

类似问题

RAROC (Risk-Adjusted Return on Capital) is calculated as:

You have been provided the following annual return data about 4 shares over a sample period 2020-2024.Which security would you choose to invest funds in if your sole objective was to minimise risk per unit of return?[Fill in the blank]

The Sharpe ratio

The Sharpe ratio

The Sharpe ratio

The Sharpe ratio

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单