what is the Sortino Ratio

The Sortino Ratio was developed by Frank A. Sortino as a way to measure risk and reward when looking at a mutual fund to invest in.

The formula looks like this

Expected Rate of Return + Risk Free Rate of Return/ Standard Deviation of Negative Assets

Before this ratio there way the Sharpe ratio which had one big problem, it considered volatility in general to be a great understanding of how risky an investment is. With the Sharpe ratio both upside volatility and downside volatility where considered to be risky. So if a fund had been making an average return of 30% for 10 years the Sharpe ratio would say it was too risky to invest in.

Sortino looked at it a little differently. His ratio only factors in downward deviation to determine how risky an investment is. So a fund can still make a great average return without looking like it is too risky.

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