A portfolio evaluation approach which simultaneously deals with different levels of risk and return, rather than holding one variable constant while making comparisons in light of the other variable. This approach uses performance measures to compare the relative risk-return trade-off performance of different portfolios. Among the most widely used methods are:
The most basis of the three methods is the Sharpe measure which relates the difference between a portfolio’s average return and the risk-free rate to the standard deviation of its return. The numerator of this ratio is, thus, the average risk premium of the portfolio. Overall, the ratio measures the unit return per unit risk for a given portfolio. This allows comparison of portfolios based on their risks and returns.
