Understanding Near-Term Distributions with the Upside Potential Ratio (UPR) – 10/31/17 Update
Dr. Frank Sortino’s work in the area of analyzing asymmetrical distributions has always been groundbreaking. His latest research has been with the Upside Potential Ratio (UPR), defined as the ratio of upside potential to downside risk. It may offer more forward-looking insight than the popularized Sortino Ratio. Can an investor use UPR analysis of the distribution over the last three years to provide useful insight about the next year? Dr. Sortino’s latest work suggests an investor can more often than not, https://pmpt.me/2017/06/24/the-cost-of-assuming-symmetry-in-a-skewed-world/
The charts below illustrates what Upside Ratio analysis of selected asset classes and ETFs over the last three years would tell us today about the next year. According to the charts done at the end of October, only Non-US Small Cap, US Large Cap, Korea, Japan and US Small Cap have UPRs greater than 1.0 for a 6% portfolio return target. This means only these asset classes and ETFs have meaningful likelihoods of returning over 6% in the next year – more upside potential than downside risk. Or, to put this another way, 27 out of 32 world indices have more downside risk than upside potential, a strong signal for caution.