The Sharpe ratio uses ______ as a measure of volatility.

A. standard deviation
B. variance
C. beta

Correct Answer: A

The Sharpe ratio uses standard deviation, not beta, as a measure of volatility. This is one of its limitations.

The Sharpe ratio measures reward per unit of risk in absolute returns, whereas the information ratio measures reward per unit of risk in benchmark relative returns. Either ratio can be applied ex ante to expected returns or ex post to realized returns. The information ratio is a key criterion on which to evaluate actively managed portfolios.