Standard Deviation Sharpe Ratio Upside/ Downside Capture
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Standard deviation Upside/ Downside capture Standard deviation measures the dispersion of a An Upside Capture Ratio greater than 100% indicates that the fund has generally returned more data set from its mean. The further the data points are from the mean, the higher the deviation within than the index during periods of positive returns for the index. A Downside Capture Ratio less than the data set. Calculating standard deviation involves taking the square root of variance by 100% indicates that the fund lost less than the index determining quadratic variation between each data during months the index had a negative return. A point relative to the mean. negative Downside Capture Ratio indicates that the fund generally has a positive return in months that In finance, annualized standard deviation is applied the index has had a negative return. to an investment’s rate of return to measure its historical volatility. This ratio shows whether a fund has gained more or lost less than a broad index during periods of market strength and weakness, and if so, by how much. 1 = ( ) × 12 1 The Upside Capture Ratio is calculated by taking the 2 � � − √ fund’s compounded monthly returns during : − months when the index has had a positive return and dividing it by the index’s compounded monthly n: number of months in the sample returns. The Downside Capture Ratio is calculated by taking the fund’s compounded monthly returns : investment return in month j during months when the index has had a negative return and dividing it by the index’s compounded : average monthly return of the sample monthly returns. Sharpe ratio , (1 + ) 12 1 The Sharpe ratio is a widely used method for = calculating risk-adjusted returns. It is calculated by ≥0 �∏ � − taking the mean portfolio return, subtracting the , (1 + ) 12 1 risk-free rate and dividing the result by the standard ≥0 deviation of the returns. Generally speaking, a �∏ � − higher Sharpe ratio is associated with a better risk- , (1 + ) 12 1 = adjusted return. Caution must be used when ∏ ≤0 interpreting Sharpe Ratios as the methodology is � (1 + )� − 1 , 12 not flawless since it can be inaccurate when looking ≤0 at assets that do not have a normal distribution of �∏ � − expected returns or for assets that have ‘fat tails.’ : Furthermore, the Sharpe ratio does not distinguish between upside volatility (positive returns) and ℎ downside volatility (losses). N: number∶ of months ℎ = − ℎ Rp: portfolio expected/mean return rf: risk free rate σp: Standard deviation of excess returns Sortino Ratio Correlation The Sortino ratio is a variation of the Sharpe ratio Correlation is a statistic that measures the degree to that is concerned with downside volatility as which two assets move in relation to each other. opposed to general volatility which includes Correlation is expressed by computing the positive returns. The Sortino ratio takes the fund’s correlation coefficient which has a value that falls return and subtracts the minimal acceptable return between -1 and 1. If the correlation coefficient is 1, (zero percent for the Algonquin Debt Strategies then the assets are perfectly positively correlated. Fund LP) and divides the result by the downside This means the two assets always move in the same deviation. Generally speaking, the higher the direction. If the correlation coefficient is -1, the two Sortino ratio the better the risk-adjusted return. assets always move in different directions. = ( , ) − , = Rp: portfolio expected/mean return MAR: Minimal acceptable return 1 ( , ) = ( ) ( ) σ: downside deviation standard deviation � − ̅ − � σ: standard deviation =1 Credit Exposure (CR01) N: number of observations Total Exposure CR01 represents the estimated impact on Net Asset Value expressed in basis points for one basis point change in credit spread on all credit positions. The Investment Manager defines “Total Exposure” to be the total absolute market value of all long and short positions of the Partnership, excluding cash, ( × ) 01 = cash equivalents and hedging positions that have the sole purpose of reducing the risk of loss and/or ∑ volatility within the Partnership’s portfolio. 1. The market value of all derivative positions not treated as a hedge will be calculated using the notional value at risk of the derivative contract. Net Credit Leverage 2. The market value of rate and debt futures, not treated as a hedge will be calculated by converting Net Credit Leverage provides a duration adjusted the futures position to the equivalent notional leverage and is calculated by taking the total credit position of government ten-year bonds (using DV01). exposure (CR01) of the Fund and converting it into the equivalent of a 5y duration notional and dividing 3. For options, the delta of the option will be used to convert the option position to the equivalent of that by the NAV. the underlying. For the purposes of concentration limits, short rate debt futures aggregated as per item (2) will be considered a government bond position. Estimated Yield Estimated Yield is net of borrow fees/leverage costs and based on the yield metric deemed most appropriate for each security type. The investment manager considers the following criteria in determining the most appropriate yield metric for each security type: For preferred shares, the yield is equal to the coupon. For mortgage-backed securities, the yield is calculated using the mid yield to maturity (Bloomberg field YLD_YTM_MID). This is the yield of a fixed income security that will solve for the mid price when valuing the security to maturity. This present value formula discounts the principal cash flows on the dates they are received. For hybrid securities and securities with call features, the yield is calculated using the open yield to worst convention (Bloomberg field YLD_CNV_OPEN). This is the lowest yield to all possible redemption date scenarios calculated using the open price. For securities maturing in less than one year, the yield is calculated based on the coupon and price. .