Risk-Adjusted Performance Evaluation of an Equity Fund

You are a portfolio manager for a wealth management firm responsible for evaluating the performance of investment funds for your high-net-worth clients. One of your clients, Mr. Jimenez, has expressed concern about the performance of his equity fund relative to a benchmark index, the S&P 500. Over the past three years, the fund has returned 8% annually, while the S&P 500 has delivered an average return of 10% per year. However, Mr. Jimenez has also noted that during a market downturn in the last year, the fund lost only 5% compared to a 15% drop in the S&P 500.

Your task is to assess the performance of Mr. Jimenez’s equity fund using risk-adjusted measures. You are expected to calculate the Sharpe Ratio and the Sortino Ratio based on the following data:

- Fund returns (annualized for the last 3 years): 8%
- Risk-free rate (annualized): 2%
- Benchmark returns (annualized for the last 3 years): 10%
- Standard deviation of fund returns: 10%
- Downside deviation of fund returns: 6%
- Maximum drawdown observed in the fund: 7%

Discuss the implications of these risk-adjusted performance metrics for Mr. Jimenez’s investment strategy and how they might influence his decision making regarding continued investment in the fund.