R8.P1.T1.Amenc_Ch4_RISK_MGMT_Topic: SORTINO_RATIO_DOWNSIDE_DEVIATION_FORMULA

[gargi.adhikari]

In reference to R8.P1.T1.Amenc_Ch4_RISK_MGMT_Topic: SORTINO_RATIO_DOWNSIDE_DEVIATION_FORMULA:-

The Formula for Sortino Ratio = ( Average PortFolio Return - MAR ) / Downside Deviation
where Downside Deviation should be = SQRT[ ( {Portfolio Return - MAR ) ^ 2 } / N ]
instead of (1/ N ) * SQRT[ ( {Portfolio Return - MAR ) ^ 2 } ] ....?

The associated Learning spreadsheet for Amenc Ch4 also calculates the Downside Deviation as
(1/ N ) * SQRT[ ( {Portfolio Return - MAR ) ^ 2 } ] .....

Please confirm the correct version... Much gratitude.

 

[David Harper CFA FRM]

Hi @gargi.adhikari Good catch, thank you! It is our mistake, Sortino should be exactly as you show it; actually, ours is missing the radical (square root) which seems to be the problem. I have fixed the note as below:
(cc: @Nicole Seaman saves as version 9-2 with no otherwise impact to pagination etc):

However, @gargi.adhikari please note that the learning spreadsheet looks accurate to me (see below). Note the downside deviation is given by SQRT(1.64%/20) where 1.64% is the numerator's summation of squared differences, T=20 is the denominator (correctly of the full number of periods, 20, not the smaller number of exceptions, 5), so I think this calculation matches the corrected (i.e, the correct) Sortino. But you've earned my attention so please feel free to further disagree. Thank you for your attention to detail, and apologies for the confusion, thanks!

 

[gargi.adhikari]

@David Harper CFA FRM Thanks so much for the clarification ...my bad on the spreadsheet...The Sortino is indeed correctly calculated in the spreadsheet...not sure how my eyes misread the formula...but thanks for confirming the Downside Deviation formula....

 

[Nicole Seaman]

Hi @gargi.adhikari Good catch, thank you! It is our mistake, Sortino should be exactly as you show it; actually, ours is missing the radical (square root) which seems to be the problem. I have fixed the note as below:
(cc: @Nicole Seaman saves as version 9-2 with no otherwise impact to pagination etc):

However, @gargi.adhikari please note that the learning spreadsheet looks accurate to me (see below). Note the downside deviation is given by SQRT(1.64%/20) where 1.64% is the numerator's summation of squared differences, T=20 is the denominator (correctly of the full number of periods, 20, not the smaller number of exceptions, 5), so I think this calculation matches the corrected (i.e, the correct) Sortino. But you've earned my attention so please feel free to further disagree. Thank you for your attention to detail, and apologies for the confusion, thanks!

@David Harper CFA FRM @gargi.adhikari

This has been updated in the study planner

Nicole