What is the common metric used to measure risk-adjusted return?

• A. Sortino ratio.
• B. Treynor ratio.
• C. Sharpe ratio.
• D. Beta.

Answer: (C)

Risk-adjusted return is about how much extra return you earn for taking on risk. The Sharpe ratio does this most broadly by comparing how much return you get in excess of a risk-free rate per unit of total risk, measured by the standard deviation of returns. In other words, it rewards portfolios that generate more return while keeping overall volatility low. Because it uses total volatility, it’s a versatile, widely understood way to compare different investments or funds with varying risk profiles.

Other measures tweak this idea in specific ways. The Treynor ratio uses only systematic risk (beta) and ignores idiosyncratic risk, which can be misleading if a portfolio’s total risk differs a lot from others. The Sortino ratio sits on the same idea as Sharpe but replaces total volatility with downside deviation, focusing on negative returns, which is useful in certain contexts but not as universally applied as the Sharpe ratio. Beta itself is a measure of market exposure, not a performance measure, so it doesn’t tell you how efficiently return is produced given risk.

So, for a general, widely adopted gauge of risk-adjusted performance, the Sharpe ratio is the best match.