Downside risk measures: semi-deviation, downside deviation, and Sortino ratio (FRM T1-12)

The two typical measures of downside risk focus on only the "bad" dispersion: Semi-deviation squares returns below the MEAN return, while downside deviation squares returns below a TARGET return (aka, minimum acceptable return, MAR). The Sortino Ratio divides by the downside deviation. [Here is my excel trtl.bz/1109-yt-sortino-frm-t1...]
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[@erikapp1088]

been trying to get an excel for this for like 3 months and found it here,,,great work Bionic

[@bionicturtle]

our pleasure!

[@boogersincoffee]

Learned this concept on my own and have been mistakenly NULLing the zeroes until now. This vid was exactly what I was looking for, thanks!

[@complextheory9529]

fantastic material

[@davidepacella1879]

Thanks, very helpful.

[@tylerjones4812]

Hello, thank you for the informative video. I'm wondering if you have ever had discussions with statisticians about the proper treatment of downside deviation if there are no data points that fall below the MAR in the set? This would lead to the sum of squared negative excess returns yielding zero, and therefore the denominator of the Sortino ratio to be zero leading to an indefinite value. I'm prone to say that in this case the set of monthly returns has no intelligible Sortino ratio or N/A but was wondering if you have other thoughts. Thanks.

[@xiaojialiu1844]

Thank you

[@salardelavarqashqai]

Hi, thank you very much for your good training. Please prepare more trainings in the field of financial risks and stock portfolio optimization with regard to technical and fundamental information.

[@vishalpoddar]

The Sharpe ratio calculated above is for 1 period. To calculate the Sharpe ratio for T period, S1 should be multiplied by sqrt(T).

[@valeriohoyos]

Can you indicate how i can interpret the semi deviation in practical terms? i have read that "Put bluntly, this will show the worst-case performance that can be expected from a portfolio, compared to the losses in an index or whatever comparable is selected." would you agree?

[@liza_yot]

What is SQRT and how can I find it?

[@reelbigstudios]

Are all the returns log returns?

[@lindading]

Why is it that when calculation semi deviation you divided by 8 but not 7. Shouldn't this be semi-deviation of a sample but not population????

[@bionicturtle]

my sources (i.e, Carol Bacon, CIPM) all happen to use (n) not (n-1), but I do see your point, it seems like you can argue for (n-1) on the theory.

[@lindading]

Thanks for the reply. No worrries. I checked with some sources and they note it as n but not n-1 as well. I guess it's because usually we when we use semi-deviation, we usually have a lot of data.

[@DimitarDobrinov]

Ok question here - for LPM (or target downside deviation) the denominator is total number of observations (incl. those above the average) in this case 8. But for semi-standard deviation shouldn't we include in the denominator only those differences that are lower than 0 (thus 4)?

[@maelpaumier5538]

@@DimitarDobrinov Here should be (4-1) = 3 as the demoninator. The video is wrong.

[@AA-pu8zf]

I never thought adding positive returns to the variance made sense about the sharpe ratio.. Sortino ftw

[@QuaQuoHD]

Haven't they told you that the Risk is dead? It died out of compassion to mankind.