Ch.10 · Benchmarks and Performance Evaluation · hard
What is the 'Sortino Ratio' and how does it improve on the Sharpe Ratio?
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EXPLANATION
Sortino Ratio = (Fund Return - Risk-Free Rate) / Downside Deviation. Unlike Sharpe which penalises all volatility (including upside), Sortino only penalises downside volatility (returns below the risk-free rate). This is more investor-friendly since upside volatility is desirable. A higher Sortino Ratio indicates better downside-adjusted performance.
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