I noticed when both assets sortino ratios are negative the asset with the worse return and worse downside deviation has better Sortino Ratio. Is there a way to fix this?
8
-
1$\begingroup$ Craig Israelson made a modification to Sharpe Ratio Formula so that when excess returns are negative for both assets sharpe ratio still retains meaning. It is done by adding exponent to the denominator. The exponent is excess return divided by absolute value of excess return. My question is can this modification also be applied to Sortino Ratio denominator? $\endgroup$– Anon9001Jul 28, 2022 at 11:05
-
$\begingroup$ IMO yes, you could do the exact same thing for Sortino as Craig Israelson did for Sharpe. $\endgroup$– nbbo2Jul 28, 2022 at 14:05
-
$\begingroup$ @nbbo2 Hmm when I apply Craig Israelson modification to Sortino Ratio when the Excess Return becomes negative the sortino ratio becomes 0. $\endgroup$– Anon9001Jul 28, 2022 at 14:54
-
$\begingroup$ This is the Excel formula I am using to calculate Sortino Ratio with Craig Israelson Modification "=RRI(10,C2,C122)/(SQRT(SUMSQ(CM3:CM122)/(COUNT(CM3:CM122)-1)^((RRI(10,C2,C122)-BX122)/ABS(RRI(10,C2,C122)-BX122)))*SQRT(12))" $\endgroup$– Anon9001Jul 28, 2022 at 15:02
-
$\begingroup$ CM3-CM122 refers to Downside Deviation. C2 refers to Portfolio Value on April 1979 and C122 refers to Portfolio Value on April 1989. BX122 refers to Risk Free Rate. SQRT (12) is done because the downside deviation is calculated from monthly returns. $\endgroup$– Anon9001Jul 28, 2022 at 15:10
|
Show 3 more comments
1 Answer
$\begingroup$
$\endgroup$
I finally figured out what was causing the issue here. The formula of Craig Israelson's Modification to Sharpe Ratio ie ER/(Standard Deviation^(ER/ABS(ER))requires usage of percentages and I was inputting decimal values. Consider this issue to be fixed.