Sortino ratio: What is sortino ratio?
The sortino ratio is a variation of the sharp ratio that distinguishes negative volatility from total volatility by using the standard deviation of the asset’s negative portfolio return-downside deviation rather than the total standard deviation of the portfolio return. The Sortino ratio assumes a risk-free rate minus the asset or portfolio and then divides that amount by the negative deviation of the asset. This ratio was named Frank A. Sortino.
– The sortino ratio differs from the sharp ratio in that it treats only the standard deviation of the negative risk rather than the total (upside plus downside) risk.
– Since the Sortino ratio only focuses on the negative deviation of the portfolio return, increasing the positive volatility is considered to be a better view of the risk-adjusted performance of the portfolio.
Sortino Ratio is a useful way for investors, analysts and portfolio managers to evaluate the return on investment at a given level of risk.
What does the sortino ratio tell you?
Sortino Ratio is a useful tool for investors, analysts and portfolio managers to evaluate the return on investment at a given level of risk. Since this scale uses only a negative deviation to measure its risk, it solves the problem of total risk or standard deviation, which is important because the above volatility is beneficial for investors and will not worry most investors.
Example of using sortino ratio
Like the sharp ratio, the higher sortino ratio gives better results. Considering two similar types of investments, a prudent investor would prefer a higher investment with a higher Soutino ratio as this means that the investor is getting a higher return per unit than the risk taking.
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