What is the Sharpe Ratio used for?

The Sharpe Ratio is a key metric used in finance to evaluate the performance of an investment by adjusting for its risk. Specifically, it measures the excess return per unit of risk taken, which makes option B the correct choice. The formula for the Sharpe Ratio involves subtracting the risk-free rate from the investment's return and then dividing this figure by the standard deviation of the investment's returns, which represents the investment’s risk.

By using the Sharpe Ratio, investors can gain insight into how well an investment compensates them for the risk they are taking. A higher Sharpe Ratio indicates that an investment has generated higher returns for each unit of risk, which is deemed favorable. On the contrary, a lower Sharpe Ratio suggests that the returns are not commensurate with the risks, possibly indicating a less attractive investment.

In comparison, calculating total fund expenses, measuring trading volume, and assessing liquidity are separate and distinct financial evaluations that do not take into account the relationship between risk and return, which is the core focus of the Sharpe Ratio. Thus, the purpose of the Sharpe Ratio specifically aligns with evaluating risk-adjusted returns.