Question

Fund A has a 5-year return of 16% and Fund B has a 5-year return of 14%. Fund A has a standard deviation of 22% and Fund B has 15%. Which fund has better risk-adjusted performance?

Accepted Answer

Fund B — it has lower returns but also much lower volatility, likely resulting in a better Sharpe Ratio — Risk-adjusted performance considers both returns and volatility. Fund B's 14% return with 15% SD may yield a higher Sharpe Ratio than Fund A's 16% with 22% SD. For investors, higher returns achieved by taking disproportionately more risk is not necessarily superior.