Sortino and SemiVariance

bigwilly Wrote: ------------------------------------------------------- > Now I’m confused. So I apologize b/c I would have > bet my life on the fact taht I read that or heard > that or learned that before, but now I cant find > it. no worries but please update us when you’ve got the answer. This is totally different from what I thought and so is very important to me … thanks. - sticky

CFAI Vol 4, pg. 336: Sortino = (ER - Rf)/DD CFAI Vol 5, pg. 62: Sortino = (ER - MAR)/DD I give up.

MAR = Rf if investors MAR is Risk Free rate

Sortino is like Roy’s Safety First, except that it uses downside deviation as the risk measure. (Sharpe is basically Roy’s where Minimum Acceptable Return (MAR) = RiskFreeRate). To make Sortino useful to compare funds, you do need to assume that the bottom half of the distribution is the same form for each fund. Usually that means assuming a normal distribution, but as long as the distributions are the same kind, that should be good enough (in practice, not sure about the CFA) for comparability. Also, the way the distribution looks above the mean is pretty much unimportant, and certainly doesn’t need to be normal. That’s what’s required for comparability, but it would be a little odd to assume that the lower half is normal but the upper half isn’t. You might decide that the “normal fit” is better on one side than the other, though.