Annualized return to be used in Sortino

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johntavv

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Reading 25, practice problem 12B asks for the Sortino ratio for the hedge fund:
Sortino = (Annualized return - minimum acceptable) / downside deviation
Sortino = (7.36 - 5) / 5.6
I understand how to find the other figures, but how do they get Annualized return for the hedge fund using:
Month hedge fund returns %
jan 3.5
feb 4
mar -2
apr -2
may -1
jun 0.9
Jul -1
aug 1.7
sep 2.7
oct 3.7
nov 0.4
dec -3.2
 
How do we get hedge fund annualized return of 7.3%?
(1.035x1.04x.98x.98x.99x1.009x.99x1.017x1.027x1.037x1.004x.968)-1 = 7.6%
 
They’re going the gemetric mean of the average return:
(1.076^(1/12)-1) *12 = 7.3%
Check out exhibit 30 on page 84. They go from an average return of 7.77% to 7.50% using the geometric mean return.
 
I see, they are using geometric return.
But why do they *12?
The geometric mean i am familiar with is: [[(1+R1)x(1+R2)x(1+Rn)]^(1/n)] - 1.
 
^ (1/12) that would give you a monthly return. you need to multiply that by 12 to get the annual return.
 
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