Sortino Ratio

The Sortino Ratio is a measure of the risk-adjusted profit of an investment. It is a modification of the Sharpe Ratio. While the Sharpe ratio takes into account the usual volatility of investment, the Sortino ratio considers only the volatility generated by downward movements. The upward movements are considered to be low and are not consulted to calculate the volatility component.

The ratio is calculated as follows:

The expected rate of return, the average return is another "standard" investment, such as the risk-free interest rate of government bonds, and the so-called downside deviation or downside volatility.

As a measure of historical returns can the Sortino ratio of compute

In calculating the volatility component only the returns are taken into account, not exceeding the Minimum Acceptable Return. Nevertheless, the total number of returns of the period is so divided.

In this case, the average geometric return.

Partial is also expected with the arithmetic mean return. Then

Usually, the Sortino ratio is calculated from monthly returns and annualized by multiplying by.

The ratio developed by Frank A. Sortino. It is particularly used as an indicator for the assessment of hedge fund investments, which aim to generate an absolute return as possible in all market phases.