Question of the Week

What two components are used to calculate risk-adjusted return?

I. Risk-free rate of return
II. Correlation coefficient
III. Conversion ratio
IV. Standard deviation

A) I and III
B) I and IV
C) II and III
D) III and IV

Answer: The correct answer is b.

Standard deviation and the risk-free rate of return are used to calculate or measure return based on the level of risk taken using what is called the Sharpe Ratio. Standard deviation is a measure of a portfolio’s total risk. The risk-free rate of return is usually the current rate of short-term Treasury bills. Correlation coefficient is a measure of how performance between different investments correlates. The conversion ratio is the number of shares of stock received when a convertible bond or preferred stock is converted by the holder.

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