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 - Risk Free Rate) / 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.

The 1 Month Treasury Rate is used as the Risk Free Rate

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