I’m completely confused by the calculation of downside deviation from the CFAI material.

According to CFAI material page 23 ,

downside deviation = square root of sum min(rt - r*, 0)^2 divided by n-1

however the answer for EOC 12 is using a different formula: square root of sum min(rt - r*, 0)^2 divided by n-1, then multiply sq rt of n. Why there is such a difference? Also the hurdle rate is not given in the question, but the answer assumes it’s 5%. Shall we do the same on the exam?

Look at the big grey box in the middle of the chapter where all these same statistics are calculated for another set of numbers. That is a pretty big grey box for this chapter.

This is probably insignficant, but I can’t help but comment because this is confusing and misleading. Calculating an annualized return for a 12 month period by taking the geometric mean and multiplying by 12 is both theoretically incorrect and against industry practice. Annuallized return for a 12 month period is equivalent to the cumulative return over the 12 month period, there’s not a lot of room for argument here.

Sachin: You’re thoughts on chain linking returns <= a year are correct.

In any case, the correct solution to annualizing the geometric mean would be to use (1+r)^12-1 instead of r*12 which is the cause of the discrepancy.

I’m not misunderstanding, and it’s a small detail but it’s incorrect. Smoothing has nothing to do with it, this is purely about inconsistent use of compounding.

The explanation is great. However, how do we know whether smooting is required or not. I can’t see any hints for using ^1/12 then - 1 then *12. I kept compounding the return then -1 at the beginning.