What is the purpose of the Sharpe ratio in evaluating investments?

• A. It measures risk-adjusted return by comparing excess return to standard deviation.
• B. It measures a stock's dividend yield.
• C. It measures portfolio beta.
• D. It measures the total return without considering risk.

Answer: (B)

The Sharpe ratio assesses risk-adjusted performance by showing how much extra return you get for each unit of total risk. It compares the investment’s excess return (over a risk-free rate) to the portfolio’s volatility, measured by the standard deviation of returns. A higher ratio means you’re getting more reward per unit of risk, making it a useful tool for comparing investments with different risk levels. This isn’t about dividend yield, which is income from dividends; it isn’t about beta, which measures relative market risk; and it isn’t just total return, since it includes how much risk was taken to achieve that return.