Sharpe's Measure of Portfolio Performance Compares the Risk Premium on a Portfolio

question 104

Multiple Choice

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

• A) a broad-based market index such as the S&P 500 index.
• B) the portfolio's standard deviation of return.
• C) the portfolio's beta.
• D) the prevailing risk-free rate of return.

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Definitions:

Risk-free Return

The theoretical return on an investment with zero risk of financial loss, typically associated with government bonds.

Treasury Bills

Short-term government securities issued at a discount from the face value and maturing at par, used as a tool for managing liquidity and financing government debt.

Common Stocks

Type of equity security that represents ownership in a corporation, offering voting rights and potential dividends.

Efficient Markets Hypothesis

A theory that suggests that financial markets are “informationally efficient,” meaning that asset prices always reflect all available information.