What does the Sharpe Ratio primarily measure?

The Sharpe Ratio primarily measures risk-adjusted return, which quantifies the excess return an investment provides over a risk-free rate in relation to its volatility or risk. Specifically, it compares the returns of an asset to its standard deviation, providing a framework for evaluating the performance of an investment while taking into account the risk involved. A higher Sharpe Ratio indicates that an investment is yielding higher returns per unit of risk, making it a popular tool among investors to assess the attractiveness of various investments.

In the context of the other options, while volatility of an asset is related to the calculation of the Sharpe Ratio, it does not encompass the full scope of what the ratio represents, which is focused on return in relation to risk. Similarly, while the expected return on investment and average market return are important concepts in finance, they do not specifically address how well a return compensates for the risk taken, which is the core function of the Sharpe Ratio.