Your client, a Canadian high-net-worth individual, is evaluating two hedge funds. Fund A has a Sortino Ratio of 1.8, while Fund B has a Sortino Ratio of 1.5, both based on a minimum acceptable return (MAR) of 0.25%. Considering only this metric, which fund would you recommend and why?

Question: Your client, a Canadian high-net-worth individual, is evaluating two hedge funds. Fund A has a Sortino Ratio of 1.8, while Fund B has a Sortino Ratio of 1.5, both based on a minimum acceptable return (MAR) of 0.25%. Considering only this metric, which fund would you recommend and why?

Answer options: ✅ Fund A, because it has generated higher returns for every unit of downside risk.

• Fund B, because its lower ratio indicates less volatility.
• Fund A, because its higher ratio means better overall total return.
• Fund B, because it has a lower standard deviation of returns.

Correct answer: Fund A, because it has generated higher returns for every unit of downside risk.

Explanation: The Sortino Ratio measures the excess return above a minimum acceptable return per unit of downside deviation. A higher Sortino Ratio indicates a better risk-adjusted return, specifically focusing on negative volatility, thus Fund A is preferable for its superior performance relative to downside risk.