in notes the formula is (portfolio return – minimum return) / downside deviation; while in the textbook it is (portfolio return – threshold return ) / standard deviation; so which one should we pick?
I think it’s time someone punched this Roy guy right in the face for creating so much confusion. I think this is probably the 6th or 7th different way I’ve seen this formula presented in a question in this group. This is what I’m going with: SF = R§ - R(Min) / SD§ where R§ = portfolio expected return R(Min) = investors minimum acceptable return (MAR), but use RFR if that is what is provided SD§ = standard deviation of the portfolio The only place I’ve seen the downside deviation used is in the Sortino Ratio
Jesus, this has somehow bugging me these days. So I finally checked that yesterday from the text of CFAI and I think it said downside deviation. Poor memory…
BTW, in the Schweser errata on the website, there’s an update to change the downside deviation to standard deviation.
OMG ! thanks BB.
I think we should not confuse 3 ratios at exam - they are very alike: 1) Sharpe Ratio = [E(Rp) - Rf] / Std(Rp) 2) Roy’s Safety First Ratio = [E(Rp) - Rmin] / Std(Rp) 3) Sortino Ratio = [E(Rp) - Rmin] / downside deviation (Rp
Two more: 5) RAROC = E(Rp) / Capital at Risk 6) RoMAD = E(Rp) / Max Drawdown %