The correct answer is C

The Sortino ratio examines the downside risk of returns. It is calculated as the portfolio return minus the minimum acceptable return (MAR) divided by a standard deviation that only uses returns below the MAR. It is similar to the target semivariance. The other responses refer to other measures of risk-adjusted performance. The Sharpe ratio divides the excess return above the risk-free rate by the standard deviation. An example of a risk-adjusted return on invested capital (RAROC) measure would be to divide the portfolio’s expected return by the VAR. The RoMAD (return over maximum drawdown) is the average portfolio return divided by the maximum drawdown. Drawdown refers to the percentage difference between the highest and lowest portfolio values during a period.

2、Jenny Rouse has been a portfolio manager for Theta Advisors for the last five years. The performance of her portfolio has had few returns below its benchmarks since its inception. Which of the following risk measures best measures Rouse’s performance?

A) Standard Deviation.

B) Range.

C) Sharpe ratio.

D) Sortino ratio. 

The correct answer is D

The Sortino ratio examines the downside risk of returns. It is calculated as the portfolio return minus the minimum acceptable return (MAR) divided by a standard deviation that only uses returns below the MAR. It is similar to the target semivariance. Since Rouse’s portfolio has had consistently higher returns, she should not be penalized for any variability on the upside. The range (the difference between the highest and lowest values), standard deviation, and Sharpe ratio (which uses the standard deviation in the denominator) examine all returns, whether they correspond to positive or negative alphas. The use of these measures would result in risk measurements that are unfairly high in Rouse’s case.

3、The Sortino ratio is most similar to the:

A) Treynor ratio.

B) information ratio.

C) relative tracking error ratio.

D) Sharpe ratio.

The correct answer is D

The Sortino ratio is similar to the Sharpe ratio except for two changes. We replace the risk-free rate with a minimum acceptable return, denoted Rmin, and we replace the standard deviation with a type of semivariance.

6、The Sortino ratio is a measure of a portfolio’s return above:

A) zero divided by the standard deviation.

B) the market return divided by beta.

C) a minimal acceptable return divided by downside deviation.

D) the market return divided by the standard deviation.

The correct answer is C

The definition of the Sortino ratio is a predefined minimal acceptable return divided by downside deviation.

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