Which ratio helps investors compare the performance of a fund to its volatility?

The identification of the ratio that helps investors compare the performance of a fund to its volatility is crucial in understanding risk-adjusted returns. Each of the ratios mentioned provides a unique perspective on a fund’s performance relative to its volatility.

The Information Ratio assesses the inefficiency of a portfolio by comparing the excess return generated by a fund over a benchmark to the volatility of those excess returns, thereby giving a measure of risk-adjusted performance specifically in relation to a benchmark.

The Sortino Ratio, on the other hand, focuses solely on downside volatility, measuring the return of an investment relative to the potential for loss. This is particularly valuable for investors who are more concerned about negative returns, making it a functional tool for risk management.

The Treynor Ratio evaluates returns in excess of the risk-free rate per unit of market risk (as measured by beta). This ratio helps investors understand how much return they are earning for the risk taken in relation to the overall market.

Since each of these ratios addresses the relationship between performance and various forms of volatility, they collectively help investors make informed decisions based on different aspects of risk. Therefore, the most comprehensive answer recognizes that all of these ratios serve the function of comparing fund performance to its volatility in different contexts.