8.43What is the Sortino ratio?
1What is it?
The Sortino ratio is like Sharpe but counts only downside volatility (bad swings).
2Why does it exist?
Investors don’t mind upward swings; Sortino focuses on the painful ones.
3Calculation
Sortino = (Return − Risk-free) ÷ Downside deviation
- (14% − 6%) ÷ 8% downside deviation = 1.0
Sortino = 1.0.
4Quick revision
- Penalises only downside volatility.
- Higher is better.
5Knowledge check
Q1. Difference between Sharpe and Sortino?Show answer
Sortino uses only downside volatility.
Q2. Higher Sortino means?Show answer
Better return per unit of downside risk.
Q3. Why might investors prefer Sortino?Show answer
It focuses on losses, which hurt.