Teamwork Advisory, LLC_2 Case Scenario - Yet another error?

CFA Level II Portfolio Management
#1

Rao identifies three reasons that the Sortino ratio is a better measure of fund performance than the Sharpe ratio. The Sortino ratio

  1. compares the return to a benchmark,
  2. offers the ability to more accurately assess performance when the return distribution is not symmetrical, and
  3. uses a target return that is based on market conditions rather than individual investor preferences.

Which of Rao’s reasons for preferring the Sortino ratio over the Sharpe ratio is least accurate?

A. Reason 1
B. Reason 2
C. Reason 3

Solution

Solution

C is correct. Rao’s third reason is not accurate. Sortino ratios use investor-specific preferences rather than market conditions.

A is incorrect. Reason 1 is accurate. The Sortino ratio compares the portfolio return with a minimum acceptable return rather than with a benchmark.

B is incorrect. Reason 2 is accurate. The Sortino ratio offers the ability to more accurately assess performance when return distributions are not symmetrical. The Sharpe ratio assumes symmetrical returns.

#2

Someone was clearly drinking too much iced coffee (or whatever) before writing that question/explanation.

1 Like
#3

Agree…