Sortino Ratio

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The Sortino Ratio is similar to the Sharpe Ratio, but uses the downside deviation rather than the standard deviation to measure risk. Like the Sharpe Ratio, the Sortino Ratio measures risk-adjusted returns of investments or portfolios. The use of downside-volatility allows the Sortino Ratio to measure the return of "negative" volatility.[1]

This ratio is complicated by the fact that data may not exist for an extended period of declining securities prices.[2]

The Sortino Ratio is often used by hedge funds, mutual funds, managed futures funds, and other money managers as a standardized way of reporting the level of risk the fund is using to achieve its returns.[3]

The Sortino Ratio was developed to tell the difference between good and bad volatility in the Sharpe Ratio.[4]

Defined

Developed by Frank Sortino, the return (numerator) is defined as the incremental compound average period return over a Minimum Acceptable Return (MAR). Risk (denominator) is defined as the Downside Deviation below a Minimum Acceptable Return (MAR).[5]

References

  1. Sortino Ratio. Ezinearticles.com.
  2. "Hedge fund terms”. Liberty Gateway.
  3. Sharpe Ratio and Sortino Ratio for a portfolio in SQL. CodeProject.com.
  4. Glossary of Terms. HedgeFund.net.
  5. Statistics Used In Performance Analysis. Managed Account Research.