What is Sortino ratio?

It's a technique to measure the risk adjusted return on an investment. It's a modification of Sharpe's ratio. It was developed by Frank A. Sortino. This ratio concentrates on bad risk rather than the volatility of a price up and down.

Where have you heard about Sortino ratio?

If you are an investor you may have heard about this and the Sharpe ratio when considering the risk involved in an investment. It is useful to see how much a return might be at certain levels of bad risk.

What you need to know about Sortino ratio.

You decide whether you want to use this ratio or the Sharpe ratio depending on whether you want to include good and bad risk, or in this case, just bad risk. You use the ratio with differing inputs to see which will give you the best return with your accepted level of bad risk.

Sortino ratio = (expected returns - risk-free returns) / standard deviation of negative asset returns

As with all risk management tools there is a chance of a loss as well as a profit.

Find out more about Sortino ratio.

To find out more about the Sortino ratio, see our definitions of risk management and the Sharpe ratio.