There is a Sortino Calculation in this problem (Alt Investments #12B CFAI Page 120 Book 5)
I understand that Sortino is (Return-Rf)/Downside,
But where are they getting the annualized return of .6133% x 12? Where is that .6133 coming from? They dont explain.
If you compound the returns as 1+ monthly x 1+ Monthly x 1+ Monthly… you get 1.07635 If you add them you get around .77…
Im sure I’m missing something simple…
1.07635^(1/12) - 1
Good God, that just makes it worse! Why would we take the 1/12th root then multiply by 12!!?
Why not just use the compounded number? Or just add em? How are we supposed to know to do stuff like that come exam day?
Page 90 of the text shows a full calculation . It calls the return a mean geometric return but does this funny calculation of turning the annualized geometric return into a monthly number ( by usual de-compounding ) and then back into an annual number using plain multiplication
Just have to do it the way they show it.
I wonder if it is because to avoid gaming of Sharpe ratio where annualized return is calculated by compounding monthly return but Std dev. are not.
Just struggled with that question myself and had the same concern about my ability to execute on a question like this come exam day. However, then I looked at the LOS list for SS13 and wondered how they construct a question that would require us to calculate the sortino ratio in this fashion. Actually, I see a good deal of calculation EOC questions without an equivalent LOS for calculation.