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LOS l: Compare and contrast the Sharpe ratio, risk-adjusted return on capital, return over maximum drawdown, and the Sortino ratio as measures of risk-adjusted performance. ffice ffice" />
Q1. In the Sortino ratio, the excess return is divided by the:
A) maximum drawdown.
B) standard deviation using only the returns below a minimum level
C) standard deviation.
Correct answer is B)
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. Both remaining 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.
Q2. 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) Sharpe ratio.
C) Sortino ratio.
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. Since Rouse’s portfolio has had consistently higher returns, she should not be penalized for any variability on the upside. Standard deviation and the 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.
Q3. Which of the following risk measures does NOT assume a normal distribution of returns?
A) RoMAD.
B) Standard Deviation.
C) Sortino ratio.
Correct answer is A)
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. For example, if the maximum portfolio value during a year was $1000 and the minimum was $900, the drawdown would be 10% [($1000 ? $900) / $1000]. This measure does not make an assumption of normality in the returns. The Sharpe ratio (which uses the standard deviation in the denominator) assumes a normal distribution of returns. The Sortino ratio examines the downside risk of returns and also assumes a normal distribution of returns.
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发表于 2009-4-7 18:56
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