The Sharpe Ratio is a measure that adjusts an investment's return for its risk. It is calculated as the

investment's excess return over the risk$-$free rate divided by its standard deviation $($volatility$).$

A higher Sharpe Ratio indicates better risk$-$adjusted performance.

The formula is:

Sharpe Ratio $=($Portfolio Return $-$ Risk$-$Free Rate$)/$ Portfolio Standard Deviation

Question:

An investor is considering two mutual funds for investment:

Fund A: Returned $12\%$ over the last year with a standard deviation of $15\%$

Fund B: Returned $9\%$ over the last year with a standard deviation of $10\%$

The risk$-$free rate was $2\%$ over the same period. Which fund had the higher Sharpe Ratio and thus better

risk$-$adjusted performance?

a$)$ Fund A with a Sharpe Ratio of $0\mathrm{.}67$

b$)$ Fund A with a Sharpe Ratio of $0\mathrm{.}80$

c$)$ Fund B with a Sharpe Ratio of $0\mathrm{.}70$

d$)$ Fund B with a Sharpe Ratio of $0\mathrm{.}90$