Sortino & Forsey Give Away

This is the last vestige of the software we have developed over the last half-century. To download the Sortino-Metrics Software click on the link below:

Right click on the Sortino-Matrix folder. A window will open. Click on Download.  The Readme word file will explain how to set it up.

The motivation for providing the executable software, Sortino-Metrics.jar, is to provide an easy way for practitioners to use these metrics to help their clients. The reason for including the source code is to encourage academics to improve on the work that Professor Hal Forsey and I have worked on for the last 50 years. We believe the metrics found in this software are an improvement on the standard metrics, particularly those in the A-B-C form shown below:

(A – B) / C

A is the average return on some portfolio of securities, B is the return on a benchmark and C is a measure of risk.  If B is the return on the 90-day T-bill, a common surrogate for the risk-free rate of return, then the numerator is that of the Sharpe ratio.  Many people also use the 90-day T-bill rate when calculating the Sortino Ratio, implying that only the risk measure, C, separates the Sortino ratio from the Sharpe ratio. Since downside risk would then be measured as deviations below the T-bill rate, the denominator of the Sortino ratio would have to be much smaller than the denominator of the Sharpe ratio.  The result is:  The Sortino ratio would always make the performance of the portfolio look better than does the Sharpe ratio.  Small wonder that many portfolio managers prefer the Sortino ratio to the Sharpe ratio when showing their performance.

Sortino first published his version of this ratio in the Journal of Risk Management in 1981.  That was a long time ago and the Sortino ratio should be replaced by a much-improved ratio, called, The Upside Potential Ratio, developed with my colleagues at Groningen University, Robert van der Meer and Auke Plantinga.  This ratio was first published in Pensions and Investments Magazine and then The Journal of Portfolio Management, both in 1999.  Hmmm, this is a long time ago also. So why is some ratio that doesn’t work as well, live on, while this superior ratio is ignored? Possibly because the Upside Potential ratio is based on a much different theory than any other.

The focus for all other asset management theory is on A, the average return on the asset.  Our theory*, focuses on B, the return on some Benchmark return required in order to achieve an investment objective that will accomplish a financial goal.  For a pension fund, B is the return required in order to meet or exceed all the promised payouts in a defined benefit plan or, meet or exceed all the payouts that would maintain the standard of living for a 401k beneficiary.  B separates good outcomes from bad outcomes.  C is the downside risk below B, a measure of the risk of not achieving the investment objective that will accomplish the goal. Mathematically it looks like this:

Visually it looks something like this to me

*Brian Rohm named it, Post Modern Portfolio Theory, in an effort to market the optimizer developed at PRI

Thus, it requires a different mindset just as MPT required a different mindset from the financial accounting approach of Graham and Dodd.

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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2 Responses to Sortino & Forsey Give Away

1. William Kwok says:

Hi Mr Sortino, thanks for the resource. I was trying to add a new index to the excel on an additional column, but when I load it, it said invalid index file. Is it only possible to substitute the indexes but not add new ones?

• Frank Sortino says:

Shouldn’t be a problem. Just make sure the format is the same. As a test, just replace the numbers , not the heading, in one existing column.