Evaluating Sharpe Ratios of Two Investment Funds

In managing a client’s investment portfolio, a financial advisor is tasked with evaluating the performance of two funds: Fund A and Fund B. Both funds have the same annual return of 12% over the last three years, however, Fund A has a standard deviation of 10%, while Fund B has a standard deviation of 15%. Additionally, the risk-free rate is 3%. Using the Sharpe Ratio to assess the risk-adjusted performance of these funds, the advisor seeks to determine which fund is the preferable investment option for a risk-averse client.

Assuming the returns are normally distributed, which fund should the advisor recommend based on their Sharpe Ratio analysis?