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CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

A mutual fund scheme earned a return of 14% in a year. The investor's minimum acceptable return (MAR) is 8% and the scheme's downside deviation relative to this MAR is 4%. What is the Sortino ratio of the scheme?

The Sortino ratio is 1.50. It is the excess return over the minimum acceptable return, 14% less 8% = 6%, divided by the downside deviation of 4%. Unlike the Sharpe ratio, it penalises only returns below the MAR.

  1. A3.50
  2. B1.50Correct
  3. C0.75
  4. D2.00

Explanation

Sortino ratio = (Portfolio return - MAR) / Downside deviation = (14 - 8) / 4 = 1.50. Dividing the raw return by downside deviation gives 3.50, which ignores the MAR. Using the MAR as the denominator gives 0.75.

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