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 = √28.78/(12−1)×√12=5.60%. The downside deviation for the index = √65.04/(12−1)×√12=8.42%.
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.
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%???
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.