The Sortino ratio, a variation of the Sharpe ratio, is a tool used to assess the risk-adjusted return of an investment. Unlike the Sharpe ratio, which considers all volatility, the Sortino ratio focuses only on downside volatility. It measures the excess return over the risk-free rate relative to the downside deviation.
The Sortino ratio is particularly useful for investors who are more concerned with downside risk. A higher Sortino ratio indicates a more favourable investment, providing higher returns for the level of downside risk taken. This metric is advantageous for comparing portfolios or investments with similar strategies but differing risk profiles.
When using the Sortino ratio, it's important to consider the investment's strategy and objectives. Because it focuses on downside risk, the Sortino ratio may be more relevant for investors with a lower risk tolerance. However, like other financial ratios, it should be used as part of a broader analysis, including other risk and performance metrics.
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