Evaluating Risk-Adjusted Performance of a Balanced Fund

Medium Performance Evaluation Performance Appraisal

James is a portfolio manager who oversees a balanced fund consisting of equities and fixed income securities. Over the last five years, the fund has consistently outperformed its benchmark index, which is composed of a 60% equity and 40% fixed income allocation. James believes that his investment strategy has been superior due to his active management approach and the asset allocation techniques he employs. Recently, a performance appraisal showed a Sharpe ratio of 1.2 for the fund, while the benchmark's Sharpe ratio was calculated at 0.9.

Considering these results, what is the most appropriate statement regarding the performance appraisal of James' balanced fund?

James' balanced fund outperformed the benchmark primarily due to higher returns without considering risk adjustments.

The Sharpe ratio suggests that James' fund has better risk-adjusted performance compared to the benchmark.

The fund's performance appraisal should disregard risk measures since returns alone indicate success.

Hint

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