Chartered Investment Manager (CIM) Practice Exam · Question
Which component of the Sharpe ratio makes it a 'risk-adjusted' performance measure?
The Sharpe ratio divides the excess return (portfolio return minus risk-free rate) by the portfolio's standard deviation. The standard deviation quantifies the
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Question: Which component of the Sharpe ratio makes it a 'risk-adjusted' performance measure?
Answer options:
- The portfolio's total return.
- The risk-free rate. ✅ The portfolio's standard deviation.
- The market benchmark return.
Correct answer: The portfolio's standard deviation.
Explanation: The Sharpe ratio divides the excess return (portfolio return minus risk-free rate) by the portfolio's standard deviation. The standard deviation quantifies the portfolio's total risk (volatility), thus adjusting the return for the risk taken.
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