Sortino Ratio

The Sortino Ratio is named after Frank Sortino, who is widely recognized for his use of downside risk.

The Sortino ratio is very similar to the Sharpe ratio in that it is trying to capture the risk of an investment over a certain period. However, the Sortino Ratio does this by capturing the "downside" risk, by ignoring the upside volatility. The theory being investors should only be concerned with harmful (negative) volatility.

Formula

Sortino Ratio = (Average Returns - RFR) / Downside Risk

Therefore, a larger Sortino Ratio would indicate a less risky investment.

Average returns is calculated by taking the monthly total returns (daily) and averaging them over the lookback period.

RFR used is the 1 Month Treasury Rate.

Downside risk is calculated by taking the standard deviation of negative monthly price returns (daily) over the lookback period.