Reading 30 EOC 11

[archived_user]

Hello everyone
I am not able to understand how did they solve this question?
This is the answer to question 11 -
A hurdle rate of 5% per year equates to a monthly hurdle rate of 5%/12 = 0.4167%.
The downside deviation for the hedge fund =
√28.78/(12−1)×√12=5.60%.
The downside deviation for the index =
√65.04/(12−1)×√12=8.42%.
How do you come up with 28.78 and 65.04?
Annualized return for the hedge fund = 0.6133% × 12 = 7.360%.
Annualized return for the index = –0.449% × 12 = –5.388%.
The Sortino ratio for the hedge fund = (7.36 – 5)/5.6 = 0.42.
The Sortino ratio for the index = (–5.39 – 5)/8.42 = –1.23.
How do you come up with 0.6133% and -0.499%???

 

[archived_user]

Anyone???

 

[archived_user]

Yeolmae wrote:
How do you come up with 28.78 and 65.04?

To find the downside deviation, you have to take the sum of squares of the mininums(Rp-Rm, 0). and dvide by n-1, and then take square root.
If the return above the hurdle is above 0, then the minmum is zero. If the return above the hurdle is below zero,then square it.

 

[archived_user]

So I have to use all values and subtract it from the minimum and then sum it up? Like we used to while calculating standard deviation in L1?? Also, these 0.6133% and -0.499%???

 

[archived_user]

Yes. You have to get the monthly hurdle rate which the answer guide shows correctly.
rt - your monthly return
r* - your hurdle rate
—-
For your other question, I’m not sure how they got the annualized return. I would have just linked all the monthly returns but that produces a different result.

 

[archived_user]

28.78 is calculated if I recall from many years ago - by only taking those months in which the rate falls BELOW the hurdle rate.
(Downside deviation)…

 

[archived_user]

Okay Thank you both of you. I’ll try solve the question and see if I get it.