Downside Deviation EOC Q12 CFA Bk 5, Reading 36

CFA Level III
#1

Page 120. Looking for help on the calculation of downside deviation. I understand the concept (at least I thought I did) but can’t get to the answer CFA has. Specifically the downside deviation for the HF. The sum of the downside deviations from the hurdle rate of 0.4167%/month is shown as 28.78. Can someone lay it out for me? I am taking all of the returns below the 0.4167% and subtracting them from that number. This is clearly wrong. Please help. Thanks.

#2

DD = if(RET < MAR) then SUM((RET - MAR)^2)/n else 0 DD-March = 5.840293889 DD-April = 5.840293889 DD-May = 2.006953889 DD-July = 2.006953889 DD-November = 0.000277889 DD-December = 13.08030189 Total = 28.77507533

#3

forgot the squaring…thanks

#4

I actually just did this question and was wondering how to come up with the annualized return of the hedge fund and the index. The return for the hedge fund is given as: .6133% x 12 = 7.360% and the annualized return for index is given as: -.449% x 12 = -5.388% If anyone could let me know where the .6133% and the -.449% came from I would greatly appreciate it. Thanks! TheChad

#5

I don’t know if any error in the solution to Q12. But you can refer to P.89~90 for the calculations.

#6

AMC Wrote: ------------------------------------------------------- > I don’t know if any error in the solution to Q12. > But you can refer to P.89~90 for the calculations. Perfect, thanks! I wasn’t using the Geometric mean. Best, TheChad

#7

I do not understand these calculations- is this important to learn them for the exam?

#8

What does MAR stand for? I would guess Index Return, but in the answer key they seem to be using the minimum monthly return of 5/12%.

#9

MAR = Minimum Acceptable Return

#10

What is exactly difference between Roy Safety criterion and Sortino? Only in downside deviation used in Sortino vs standard deviation used in Roy Safety measure? Both exactly use Exp. return above MAR.

#11

Other than the differences in the denominator, I’m not entirely sure conceptually. They seem to be very close in what they’re attempting to measure. It probably boils down to the characteristics of what is being measured. For example, RSF may be more informative for an individual investor’s portfolio while Sortino may be so for a hedge fund since it doesn’t penalize extreme positive returns.

#12

Exactly, I have similar conclusion but I have never looked for information. This topic reminded me to this old doubt. Thanks for your post.