Sortino

CFA Level III Portfolio Management
#1

SS 13 (hedge funds) says Sortino = (Return - Risk free rate) / downside dev

SS 14 (34.l) says Sorino = (Return - MAR) / downside dev

so which is it, Risk free rate or MAR?

#2

it depends.

MAR = Minimum Acceptable Return.

If nothing is provided - then rf = Risk Free Rate is your MAR.

And to clarify

based on that your downside deviation would correspondingly change.

Downside deviation = Std deviation of returns below the MAR (or risk free rate) as the case might be.

#3

So if MAR isnt given use risk-free rate?

#4

Yes, if MAR is not given use the risk-free rate.

#5

V5, P88. Check out the paragraph above the formula.

#6

Just a thought … if something is stated that is wrong or otherwise is right - can you please state that fact.

instead of pointing to a pg. number … for the next one month please.

if by your research you found something that is important / different from what has been presented let us help each other please.

not everyone has all the books on hand (or access to them while we work).

thanks for understanding.

#7

Says either the MAR or the risk-free rate can be used for Sortino.

#8

Sure. Just let you know that my CFAI ebook is installed on another machine…now I move to this machine.

"The Sortino ratio replaces standard deviation in the Sharpe ratio with downside deviation. Instead of using the mean rate of return to calculate the downside deviation, the investor’s minimum acceptable return or the risk-free rate is typically used. The reading on risk management has further comments on this mea- sure. The Sortino ratio is

Sortino ratio =(Annualized rate of return - Annualized risk-free rate)/Downside deviation

" – Page(88)

The decison to use MAR or RFR will affect the calculation of downside deviation.

#9

thank you for confirming that … mcap11 and tulkuu