Sortino Ratio

[Serendipity1]

Hi I have one qustion regarding Sortino Ratio.
The formula for Sortino Ratio that is used in a certain spreadsheet is (Cumulative Annualized Return - MAR) / Monthly Downside Deviation. I think it is inaccurate.
I think that the numerator and denominator should use a same measurement period and unit, i.e. (monthly average return-MAR)/monthly deviation or (annualized return-MAR)/annualized downside deviation. Can anyone verify this for me?
The second question is whether we should use (monthly average return-MAR)/monthly downside deviation to calculate Sortino Ratio for the period less than 1 year as opposed to annualized return and annualized downside deviation.
Thank you for your help in advance.

 

[bchad]

Well, usually you want your numerator and your denominator to reflect similar time periods, so monthly numerators and monthly denominators, or annualized numerators and annualized denominators.
However, if you are making relative comparisons among investments or portfolios, then you just have to be consistent and state what the numerator and denominator are. If it’s internal use, it sometimes doesn’t matter that much. For marketing material, though, it’s kinda iffy.

 

[maratikus]

i agree with bchadwick that the key is to compare apples and apples if you use the measure internally. If you use it externally I would use annualized monthly returns and annualized monthly downside deviation.