I wonder, if this excel approach is correct. Calculating std. deviation you simply skip (leave blank space) by any situation when we have positive excess return - instead of assuming 0 excess return. At the same time you take these positive months to calculate the portfolio average. For excel blank cells is not zero.
Sortino ratio will help one compare portfolios that have the same benchmark. Sharpe Ratio helps one compare portfolios with different benchmarks. Thats because benchmark returns are not used in sharpe ratio. It looks at only its own deviation and compares with the mean returns. Hence different portfolios with different benchmarks can be compared.
Thanks Ronald for your video; I would also challenge one part of your example; as you want to calculate the Sortino Ratio of Po(A) you should only sum the negative values. As the positive variations should not be a concern for downside risk. And in case the variations would be largely positive e.g. 10 instead of 1, the Sortino ratio would show a larger DR on Portfolio A which seems to be exactly what Sortino wants to prevent
I don't think the denominator in sortino ratio should be the standard deviation of the negative returns because if these negative returns are very close to each other the standard deviation will be close to zero implying very little risk even in cases where the negative returns are very large (but close to each other). I think the denominator should simply be the root mean square of the negative returns.
Didn't you describe the information ratio instead of the sortino ratio in this calculation? I think the Sortino Ratio describes the risk-free interest rate
Both ratios have value. But Sharpe is superior. Why? Seasoned investors seek to understand risk and reward in both up and down scenarios. In other words, how much risk do I have to endure to make a profit (or a loss). Ignoring the upside --the overwhelmingly most common scenario since the dawn of equity markets--is a fool's errand. We use Sharpe and a proprietary formula that essentially isolates positive standard deviations.
I wonder, if this excel approach is correct. Calculating std. deviation you simply skip (leave blank space) by any situation when we have positive excess return - instead of assuming 0 excess return. At the same time you take these positive months to calculate the portfolio average. For excel blank cells is not zero.
Sortino ratio will help one compare portfolios that have the same benchmark. Sharpe Ratio helps one compare portfolios with different benchmarks. Thats because benchmark returns are not used in sharpe ratio. It looks at only its own deviation and compares with the mean returns. Hence different portfolios with different benchmarks can be compared.
Thanks Ronald for your video; I would also challenge one part of your example; as you want to calculate the Sortino Ratio of Po(A) you should only sum the negative values. As the positive variations should not be a concern for downside risk. And in case the variations would be largely positive e.g. 10 instead of 1, the Sortino ratio would show a larger DR on Portfolio A which seems to be exactly what Sortino wants to prevent
I love you my guy! This helped me tremndously.
isnt it should be the sqrt of the month with number of negative returns
I don't think the denominator in sortino ratio should be the standard deviation of the negative returns because if these negative returns are very close to each other the standard deviation will be close to zero implying very little risk even in cases where the negative returns are very large (but close to each other). I think the denominator should simply be the root mean square of the negative returns.
what if downside standard deviation is zero?
It can't be zero because you are looking at the deviation from the mean. You'd have a higher mean if there was no downside at the mean you have.
Thanks for clear explaination. Really does helpful to my research!
Dont you take abs values so -1.34% - 1.11 % you would have -2.45 ?surely
Didn't you describe the information ratio instead of the sortino ratio in this calculation? I think the Sortino Ratio describes the risk-free interest rate
Thanks for clear explanation
You should consider the annualized return but you didn't do it
You used the monthly return
This is wrong that I think
Both ratios have value. But Sharpe is superior. Why? Seasoned investors seek to understand risk and reward in both up and down scenarios. In other words, how much risk do I have to endure to make a profit (or a loss). Ignoring the upside --the overwhelmingly most common scenario since the dawn of equity markets--is a fool's errand. We use Sharpe and a proprietary formula that essentially isolates positive standard deviations.