SortinoRatio
. This function,
Upside Potential Ratio, was a further improvement,
extending the measurement of only upside on the
numerator, and only downside of the denominator of the
ratio equation.UpsidePotentialRatio(R, MAR = 0,
method = c("subset", "full"))
Sortino proposed an improvement on the Sharpe Ratio to
better account for skill and excess performance by using
only downside semivariance as the measure of risk. That
measure is the SortinoRatio
. This function,
Upside Potential Ratio, was a further improvement,
extending the measurement of only upside on the
numerator, and only downside of the denominator of the
ratio equation.
Sortino contends that risk should be measured in terms of
not meeting the investment goal. This gives rise to the
notion of
Choosing the MAR carefully is very important, especially when comparing disparate investment choices. If the MAR is too low, it will not adequately capture the risks that concern the investor, and if the MAR is too high, it will unfavorably portray what may otherwise be a sound investment. When comparing multiple investments, some papers recommend using the risk free rate as the MAR. Practitioners may wish to choose one MAR for consistency, several standardized MAR values for reporting a range of scenarios, or a MAR customized to the objective of the investor.
$$UPR=\frac{ \sum^{n}_{t=1} (R_{t} - MAR) }{
\delta_{MAR} }$$ where $\delta_{MAR}$ is the
DownsideDeviation
.
The numerator in UpsidePotentialRatio
only uses
returns that exceed the MAR, and the denominator (in
DownsideDeviation
) only uses returns that
fall short of the MAR by default. Sortino contends that
this is a more accurate and balanced protrayal of return
potential, wherase SortinoRatio
can reward
managers most at the peak of a cycle, without adequately
penalizing them for past mediocre performance. Others
have used the full series, and this is provided as an
option by the method
argument.
Plantinga, A., van der Meer, R. and Sortino, F. The
Impact of Downside Risk on Risk-Adjusted Performance of
Mutual Funds in the Euronext Markets. July 19, 2001.
Available at SSRN:
SharpeRatio
SortinoRatio
DownsideDeviation
SemiVariance
SemiDeviation
InformationRatio
data(edhec)
UpsidePotentialRatio(edhec[, 6], MAR=.05/12) #5 percent/yr MAR
UpsidePotentialRatio(edhec[, 1:6], MAR=0)
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