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Sortino Ratio


Sortino ratio is a financial ratio that is used to measure the performance of investment portfolio and is very similar to a Sharpe ratio. The main difference between Sortino ratio and Sharpe ratio is that Sharpe ratio includes normal standard deviation of the portfolio while Sortino ratio calculates standard deviation only from negative returns of a portfolio during the period. 


Sortino ratio formula

Sortino ratio = (Expected return of portfolio – Risk free rate) / Adjusted standard deviation of portfolio*


* Adjusted standard deviation of the portfolio means standard deviation that uses only negative values of return for calculation (positive returns are excluded during the calculation).  


From one point of view Sortino ratio has advantage against Sharpe ratio because it eliminates the positive volatility which may mean not the real volatility but better management and excess returns. However, from another point of view it may be disadvantage, especially if market was increasing during that period because the negative return will not be fully unmasked and the real volatility will remain unclear. 


Other ratios that are used for investment performance measurement are Jensen’s alpha, Treynor ratio, and of course Sharpe ratio which already was mentioned before. 



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