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Reading 30 EOC 11

Hello everyone

I am not able to understand how did they solve this question?

This is the answer to question 11 -

A hurdle rate of 5% per year equates to a monthly hurdle rate of 5%/12 = 0.4167%.
                           The downside deviation for the hedge fund = 
                          The downside deviation for the index = 

How do you come up with 28.78 and 65.04?

                           Annualized return for the hedge fund = 0.6133% × 12 = 7.360%.
                           Annualized return for the index = –0.449% × 12 = –5.388%.
                           The Sortino ratio for the hedge fund = (7.36 – 5)/5.6 = 0.42.
                           The Sortino ratio for the index = (–5.39 – 5)/8.42 = –1.23.

How do you come up with 0.6133% and -0.499%???

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Yeolmae wrote:

How do you come up with 28.78 and 65.04?


To find the downside deviation, you have to take the sum of squares of the mininums(Rp-Rm, 0). and dvide by n-1, and then take square root.

If the return above the hurdle is above 0, then the minmum is zero. If the return above the hurdle is below zero,then square it. 

So I have to use all values and subtract it from the minimum and then sum it up? Like we used to while calculating standard deviation in L1?? Also, these  0.6133% and -0.499%???

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Yes. You have to get the monthly hurdle rate which the answer guide shows correctly. 

rt - your monthly return

r* - your hurdle rate


For your other question, I’m not sure how they got the annualized return. I would have just linked all the monthly returns but that produces a different result.

28.78 is calculated if I recall from many years ago - by only taking those months in which the rate falls BELOW the hurdle rate.

(Downside deviation)…


Okay Thank you both of you. I’ll try solve the question and see if I get it. 

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