Sortino Ratio


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Sortino Ratio

A variation on the Sharpe ratio that measures the risk-adjusted return on an investment. The Sortino ratio considers the possibility that an investment will fall below the required rate of return, rather than volatility in general. It is calculated as follows:

Sortino Ratio = (Realized return - Required return) / Downside risk.
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MT Best for VETS Index Versus Benchmarks, Summary Statistics for December 31, 2012 through October 30, 2018 Thomson MT Best Reuters/ Equal- for VETS S-Network Weighted S&P Index ESG Index 500 Index Annualized Return (Percent) 19.29 13.97 12.70 Annual Standard Deviation 10.47 10.45 10.27 Sharpe Ratio 1.79 1.29 1.19 Downside Monthly Deviation 1.38 1.68 1.68 Sortino Ratio 1.07 0.65 0.60 Russell S&P 500 3000 Index Index Annualized Return (Percent) 11.69 13.92 Annual Standard Deviation 10.13 9.94 Sharpe Ratio 1.10 1.35 Downside Monthly Deviation 1.68 1.61 Sortino Ratio 0.55 0.68
Investors need to use benchmark-independent measures of risk-adjusted return, such as the Sharpe Ratio, Sortino Ratio and Omega Ratio.
The Sortino ratio is the relation of the surplus average return on investment [bar.r] over the minimum required rate of return m to [sigma](m)--the level of risk associated with the investment.
Sortino and van der Meer [12] presented the Sortino ratio as a variation of Sharpe ratio that adjusted the expected return for the risk of falling short of the risk-free return.
Third, given the potential for non-normal return distributions, we provide an examination of emerging equity performance using measures that account for both symmetric return distributions (standard deviation and Sharpe ratio) and asymmetric return distributions (downside deviation and Sortino ratio).
For the purpose of our analysis of the mutual fund management performances, taking both the profitability and risks into account, some common tools are used, such as the Sharpe ratio, Treynor ratio and the Sortino ratio. The research covers the period 2006 to 2010.
These measures include the Sortino Ratio (Sortino & Meer, 1991; Sortino & Price, 1994), Sortino (2000); Generalized Sharpe Ratio (Hodges, 1997); Leland Alpha (1999); (Martin, Rachev and Siboulet, 2003), (Rachev, Ortobelli & Shwartz, 2004); Omeg Ratio (Keating & Shadwick, 2002); Farinelli and Tibiletti Ratio (Farinelli & Tibiletti, 2003), Adjusted Sharpe Ratio (Pezier, 2008); (Alexander, 2008).
(32) Apart from the probably most classic performance measure in finance literature, the Sharpe ratio, we calculate the Sortino ratio, the Calmar ratio, and the excess return on value at risk (VaR) for the asset classes under consideration.
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.
Feibel (2003) defines Sortino ratio as a measure of downside risk, where positive returns are not observed.