Sortino Ratio

Financial Indicator

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The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio or strategy. It is a special subset of the Sharpe ratio but penalizes only those returns falling below a user-specified target, or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment risk-adjusted returns, they do so in significantly different ways that will frequently lead to differing conclusions as the true nature of the investment return-generating efficiency.

Sortino Ratio 
 = 
ER[a] - ER[b] 
DD 

The Sortino ratio is named after Frank A. Sortino and can be interpreted as the actual rate of return in excess of the investor target rate of return per unit of downside risk

Sortino Ratio In A Nutshell

Taking a look at the Sortino ratio, it is a close cousin of the Sharpe ratio. If you need more information on the Sharpe ratio, check out the equities center on Macroaxix. This ratio has the ability to pick apart the potential negative volatility from the general volatility of the market.

When you have a portfolio, it is important to measure the amount of risk that is included in your portfolio. This ratio is beneficial if you are trying to evaluate the amount of negative risk may be in an investment. What this ratio also uses is standard deviation to the downside.

If there is one thing we’ve all learned through financial education is there are many different kinds of ratios out there, telling us different stories about the data we are looking at. The Sortino ratio is no different.

Closer Look at Sortino Ratio

With each ratio you have to understand what factors go into it and what makes it tick because you may find it is not addressing the appropriate parts of your investing or trading.

Once you find the end number, you want the ratio to be as high as possible, as this indicates that the returns are being earned with more efficiency. You may see higher returns with one fund, but the effenciency with which they are being earned may create more risk.

Investing is a balancing act between risk and return, and once you find your sweet spot you can begin to optimize other areas of your investing portfolio. Be sure to test this and know this ratio inside and out before implementing this into your current setup.