[ 2009 FRM Sample Exam ] Investment Management Q5 Investment, statements, following, return, about

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5. Which of the following statements about the Sortino ratio are valid?

I. The Sortino ratio is more appropriate for asymmetrical return distributions.

II. The Sortino ratio compares the portfolio return to the return of a benchmark portfolio.

III. The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses variance as a risk metric.

IV. The Sortino ratio is defined on the same principles as the Sharpe ratio, but the Sortino ratio replaces the risk free rate with the minimum acceptable return and the standard deviation of returns with the standard deviation of returns below the minimum acceptable return.

II and III.

I, III and IV.

I and III.

I and IV.

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Correct answer is D

A is incorrect. II - The information ratio, not the Sortino ratio, compares the portfolio return to the return of a benchmark portfolio. III - The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance, not variance, as a risk metric.fficeffice" />

B is incorrect. III - The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance, not variance, as a risk metric.

C is incorrect. III - The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance, not variance, as a risk metric.

D is correct. I - Since the Sortino ratio uses the notion of semi-variance, it is more appropriate for asymmetric return distributions than any metric that uses standard deviation (such as the Sharpe ratio). IV - The Sortino ratio is similar to the Sharpe ratio, except the risk free rate is replaced with the minimum acceptable return in the numerator and the standard deviation of the returns is replaced with the standard deviation of the returns below the minimum acceptable return in the denominator. II - The information ratio, not the Sortino ratio, compares the portfolio return to the return of a benchmark portfolio. III - The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance, not variance, as a risk metric.

Reference: Amenc & Le Sourd. Portfolio Theory and Performance Analysis, Chapter 4, page 115-116.