What is the Sortino Ratio?
The Sortino Ratio measures risk-adjusted returns by dividing excess return (portfolio return minus risk-free rate) by downside deviation, which measures volatility only when returns fall below a target threshold.
What is a good Sortino Ratio?
A Sortino Ratio above 2.0 is considered excellent, 1.0-2.0 is good, 0.5-1.0 is acceptable, and below 0.5 is poor. Negative values indicate the investment underperformed the risk-free rate.
How is Sortino Ratio different from Sharpe Ratio?
The Sortino Ratio only penalizes downside volatility, while the Sharpe Ratio penalizes all volatility. This makes Sortino more relevant for investments with asymmetric returns, as it ignores favorable upside movements.
Can Sortino Ratio be negative?
Yes. A negative Sortino Ratio means the portfolio returned less than the risk-free rate, indicating the investment underperformed a risk-free alternative.
What is downside deviation?
Downside deviation measures volatility only when returns fall below a target return level. Unlike standard deviation, it ignores positive price movements, focusing solely on the risk of losses.