Definition
The Sortino Ratio is a variation of the Sharpe Ratio that only considers downside volatility (negative returns) rather than total volatility. Since investors are primarily concerned with downside risk, the Sortino Ratio provides a more relevant measure for many. It divides excess return by the standard deviation of only negative returns (downside deviation). Higher Sortino Ratios indicate better downside risk-adjusted performance and are particularly useful for evaluating investments with asymmetric return distributions.
Formula
Example
Two funds both return 12% with identical total volatility, but Fund A has most swings to the upside while Fund B has equal up and down swings. Fund A's Sortino Ratio is higher, correctly reflecting its superior downside protection.
FAQ
What is Sortino Ratio?
Risk-adjusted return measuring excess return per unit of downside risk only.
How do you calculate Sortino Ratio?
A common formula for Sortino Ratio is: Sortino Ratio = (Return - Risk-Free Rate) / Downside Deviation
Why is Sortino Ratio important?
Sortino Ratio helps investors evaluate portfolio management and make more informed decisions.