Sortinos

Sortinos refers to a family of investment metrics used to evaluate the risk-adjusted performance of an investment. Similar to the Sharpe ratio, Sortinos measure excess return relative to volatility, but they specifically focus on downside deviation, which is the volatility of negative returns. This distinction is important because investors are generally more concerned with the risk of losing money than with the risk of gains exceeding expectations.

There are a few common variations of the Sortino ratio. The most basic form calculates the difference between an investment's return and a minimum acceptable return, divided by the downside deviation. The minimum acceptable return is often set at zero, representing the risk-free rate or a target return. A higher Sortino ratio indicates a better risk-adjusted performance, as it means the investment is generating more return for each unit of downside risk.

The Sortino ratio is particularly useful for investors who want to isolate the impact of negative volatility on their portfolio. It helps differentiate between an investment that has high overall volatility but few significant losses, and an investment that experiences substantial drawdowns. By focusing on downside deviation, Sortinos provide a more nuanced view of risk than metrics that consider all volatility, both positive and negative. This can lead to more informed investment decisions, especially for those who are risk-averse.