Evaluate Risk-Adjusted Performance using the Sharpe Ratio

Imagine you are an investment advisor assessing the performance of two mutual funds, Fund A and Fund B. Fund A has an annual return of 12% with a standard deviation of 8%, while Fund B has an annual return of 10% with a standard deviation of 5%. Using the Sharpe ratio, evaluate which fund demonstrates superior risk-adjusted performance.

To calculate the Sharpe ratio, use the formula: Sharpe Ratio = (Return of the investment - Risk-free rate) / Standard deviation of the investment. Assume the risk-free rate is 2%.

Discuss your findings and the implications of your analysis for a potential investor.