The correct answer is C.

The Sharpe ratio is a risk-adjusted performance metric that measures the excess return of an investment or portfolio relative to its total risk. The total risk is measured by the standard deviation of the investment or portfolio's returns. The Sharpe ratio is calculated by subtracting the risk-free rate from the expected return of the investment or portfolio, and then dividing the result by the standard deviation of the investment or portfolio's returns. This ratio provides a measure of the excess return earned per unit of total risk, which includes both systematic and unsystematic risk. The higher the Sharpe ratio, the better the investment or portfolio's risk-adjusted performance.

Choice A is incorrect. Jensen's alpha is a risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This metric does not specifically measure excess return per unit of total risk.

Choice B is incorrect. The Treynor ratio, also known as reward-to-volatility ratio, measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. It does not take into account total risk but only systematic risk.

Choice D is incorrect. The Sortino ratio differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns—downside deviation instead of total standard deviation used in Sharpe Ratio. Therefore, it doesn't measure excess return per unit of total risk but rather focuses on downside or harmful volatility.

Things to Remember

• Sharpe ratio is also known as the Sharpe index.
• It helps investors understand the return of an investment compared to its risk.
• Sharpe ratio is a widely used measure for evaluating the performance of investment portfolios.
• It is important to consider the risk-free rate when calculating the Sharpe ratio.
• Jensen's alpha is used to determine the abnormal return of a security or portfolio.
• Treynor ratio focuses on systematic risk and is useful for evaluating the performance of diversified portfolios.
• Sortino ratio is similar to Sharpe ratio but only considers downside risk.