Mr. Lee is a risk-averse investor primarily concerned with capital preservation, but also seeks reasonable growth. His mutual fund representative has presented him with two fund options, Fund A and Fund B, which have delivered similar average annual returns over the past five years. To help Mr. Lee make an informed decision, which additional metric should the representative emphasize to assess which fund better balanced risk and return?

Question: Mr. Lee is a risk-averse investor primarily concerned with capital preservation, but also seeks reasonable growth. His mutual fund representative has presented him with two fund options, Fund A and Fund B, which have delivered similar average annual returns over the past five years. To help Mr. Lee make an informed decision, which additional metric should the representative emphasize to assess which fund better balanced risk and return?

Answer options:

• The fund's expense ratio (MER).
• The fund's highest annual return over the period. ✅ Risk-adjusted return measures, such as the Sharpe Ratio or Sortino Ratio.
• The total assets under management (AUM) for each fund.

Correct answer: Risk-adjusted return measures, such as the Sharpe Ratio or Sortino Ratio.

Explanation: When two funds have similar returns, evaluating risk-adjusted performance helps determine which fund achieved those returns more efficiently by taking on less risk. Tools like the Sharpe Ratio compare return to total risk, while the Sortino Ratio focuses on downside risk.