Chartered Retirement Planning Counselor (CRPC) Practice Exam 2025 - Free CRPC Practice Questions and Study Guide

The Sharpe ratio is a key metric in finance used to understand the return of an investment compared to its risk. It is specifically designed to measure total risk, which is assessed by standard deviation. This ratio indicates how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset.

By taking the average return of the investment over a risk-free rate and dividing it by the standard deviation of the investment's returns, the Sharpe ratio provides insights into the risk-adjusted performance of an asset or portfolio. A higher Sharpe ratio is indicative of greater returns for each unit of risk taken, making it a valuable tool for investors who want to balance their potential rewards against the risks they assume.

The other options do not align with what the Sharpe ratio measures. It does not focus exclusively on systematic risk, nor does it quantify total return through sales figures. Additionally, the Sharpe ratio is not limited to just inflation-adjusted returns, as it provides a more holistic view of how much return is being earned relative to total risk.