How is the Sharpe ratio of the market calculated?

The Sharpe ratio of the market is calculated by taking the return premium of the market over the risk-free rate and dividing it by the standard deviation of the market's excess returns, which captures the market's risk.

The return premium for the market reflects the additional return expected from the market as a whole compared to a risk-free asset, while the standard deviation serves as a measure of the volatility or risk associated with the market's returns. By using this calculation, investors can assess how well the market is performing relative to its risk, allowing for a comparison with other investment alternatives.

In comparing this to the other options, it is important to notice that the definition provided in option B directly adheres to the established financial formula for the Sharpe ratio. Other options do not accurately reflect this relationship or the components involved in calculating the market's Sharpe ratio.