Guys, Reading 36 -problem 43 on page 129 Statement 4: The Sortino ratio is the best means to examine the cosistency of hedge fund returns 43. Statement 4 is: A. Correct B. Incorrect, because it would be bettwer to use rolling returns C. Incorrect, because it would be better to use the downside deviation
Downside deviation measures the bottom portion of variance (standard deviation’s lower half) (measures variance) Sortino ratio is like sharp ratio, only replacing standard deviation with downside deviation. (measures risk-return) Rolling returns are used to measure consistency of performance over time. (consistency)
Thanks McLeod81. Got it.
Further question - isn’t it the case that volatility of returns is more persistent through time than the level of returns? In that case, shouldn’t it volatiity / deviation the best means to examine the performance of hedge fund?
I guess we are measuring Hedge Fund Returns-consistence/levels(Not Hedge Fund Volatility!)-and to account for Return adjusted for risk(to avoid taking excessive risk),we are comparing alternative measures of Risk to finally arrive at Risk Adjusted Return,rather than Returns adjusted risk?
I found this paper to be a helpful supplement.
And a bonus BBG video: