Quant charts explained: Sortino

The Sortino ratio is a ratio of absolute return to absolute downside risk taken.

What does the chart show?

The Sortino Ratio considers downside risk rather than total risk. Total risk includes volatility of both positive and negative excess returns while downside risk includes only volatility of negative excess returns.

Sortino Ratio produces a risk-adjusted measure that doesn’t penalise products with high upside volatility.

How to interpret the ratio

In comparing Sortino Ratios, a higher number is preferred. The higher the ratio, the higher the absolute return is for each unit of downside risk.

When to use the chart

When the selected products, benchmarks or portfolio exhibit asymmetrical upside and downside volatility, Sortino Ratio will provide a more accurate assessment of risk-return efficiency than Sharpe Ratio. 

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