Sortino Ratio

Definition

The Sortino Ratio is a risk-adjusted metric that measures an investment’s excess return relative to downside risk by using only negative deviation, rather than total risk. A higher Sortino Ratio indicates better risk-adjusted performance.

Formula

$\text{Sortino Ratio} = \frac{R_p - R_f}{\sigma_d}$

Where:

• $R_p$ = Portfolio return
• $R_f$ = Risk-free rate
• $\sigma_d$ = Downside deviation (standard deviation of negative portfolio returns)