Evaluating Risk-Adjusted Performance

Easy Performance Evaluation Performance Appraisal

John is an investment manager evaluating the performance of his mutual fund over the past year. The fund has consistently outperformed its benchmark index, returning 12% while the benchmark returned 8%. However, John is concerned about the risk adjustments of this performance. He uses the Sharpe ratio to measure the risk-adjusted performance of his fund, taking into account the risk-free rate of return, which he estimates at 2%.

Based on this information, how should John appraise the fund's performance in relation to the benchmark?

The fund's performance is excellent, as it outperformed the benchmark in raw terms.

The fund's performance may not be as favorable when considering risk, indicating a potential concern.

The fund's performance is poor because the average return is below the risk-free rate.

Hint

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