Cholesterol and Volatility
10 Pages Posted: 17 May 2013
Date Written: October 1, 2010
In this paper, we examine the nature of volatility to better understand the meaning of and differences between the two standard risk metrics that use it as a basis: the Sharpe ratio and the Sortino ratio. We review how upside and downside volatilities are calculated, and illustrate their usefulness as well as some of their shortcomings when applied to markets and investment funds. In particular, we will show that while volatility is a widely used measure of risk, absence of volatility does not equate to absence of risk.
Keywords: volatility, sharpe ratio, sortino ratio, investment risk
JEL Classification: G11
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