One of these measures is the Sortino ratio
(see Sortino and Van Der Meer, 1991), which employs the lower partial moment of order 2 (LPM2) instead of the standard deviation, that is,
As proved by Pedersen and Satchell (1998, 2002), the Sortino ratio
(which corresponds to Kappa (2)) is linked to utility function with lower risk aversion.
Resumed by a poetical definition: "Risk, like beauty, is in the eye of the beholder" (Balzer, 1994), the PMPT is currently based on the Sortino ratio
, which measures returns adjusted for the target and downside risk (Sortino & Horsey 1996; Sortino, 2001).
For some, the Sortino ratio
(see exhibit 2, below), which measures a fund's downside risk, has supplanted the Sharpe ratio, which measures volatility up and down.
2] Sortino ratio
is a ratio used mainly in the context of hedge funds.
Merlin's new reporting functionality is available for the full range of measurements that investors demand, including Sharpe ratio, Treynor ratio, volatility, skew on returns, Alpha and Beta versus benchmark (including customized and blended benchmarks), up and down capture ratios, Sortino ratio
Everything You Need To Know About The Sortino Ratio
The Sortino Ratio
was developed to differentiate between deviations on the upside and on the downside, and is more consistent with the investors' concern over risk of losses in their investment.
The PUT Index had a higher Sharpe Ratio, higher Sortino Ratio
, and more negative skewness than the S&P 500 Index.
Funds that met the qualification criteria and had top quartile returns in their category were ranked based on returns, Sharpe and Sortino ratios
and downside deviation.
So I look at opportunities with a vigilant eye on downside risk measures, like Sortino Ratios
and correlation, focusing on the likelihood that different asset classes will head south at the same time (as they did in 2008).
Where were the financial experts who should have been asking questions that probed beyond the simple Sharpe and Sortino ratios
, both of which understate the risk of their respective return streams because they don't adequately capture gap risk?