Answer: Sharpe ratio

## Explanation The correct answer is **C. Sharpe ratio**. ### Why Sharpe Ratio is Correct: - The Sharpe ratio measures the excess return of an investment or portfolio relative to its **total risk** - Total risk is measured by the **standard deviation** of the investment or portfolio's returns - Calculation: (Expected Return - Risk-Free Rate) / Standard Deviation - Provides a measure of excess return earned per unit of **total risk** (both systematic and unsystematic risk) - Higher Sharpe ratio indicates better risk-adjusted performance ### Why Other Options are Incorrect: **A. Jensen's alpha**: - Measures average return over and above that predicted by CAPM - Based on portfolio's beta and average market return - Does not specifically measure excess return per unit of total risk **B. Treynor ratio**: - Also known as reward-to-volatility ratio - Measures returns earned in excess of risk-free investment per unit of **market risk** (systematic risk only) - Does not account for total risk **D. Sortino ratio**: - Differentiates harmful volatility from total volatility - Uses **downside deviation** instead of total standard deviation - Focuses on downside or harmful volatility rather than total risk

Author: Tanishq Prabhu