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Sortino Ratio – Meaning & Difference from Sharpe Ratio
Key Mutual fund Terms
The Sortino Ratio is a performance measurement tool that focuses specifically on the downside risk of an investment rather than overall volatility.
Important features of the Sortino Ratio include:
Focus on Downside Risk
Unlike the Sharpe Ratio, which considers both positive and negative volatility, the Sortino Ratio only evaluates negative volatility that results in losses.
Better Measurement of Investment Risk
Investors generally worry more about losing money than about gains. The Sortino Ratio therefore provides a more relevant measure of risk for many investors.
Higher Ratio Indicates Better Risk Management
A higher Sortino Ratio suggests that the fund has generated strong returns while minimizing downside risk.
Useful for Comparing Funds with Similar Returns
If two funds deliver similar returns, the fund with the higher Sortino Ratio has typically managed losses more effectively.
Helps Evaluate Fund Manager Skill.
The ratio can help investors understand how well a fund manager protects the portfolio during market downturns.
Relevant for Conservative Investors
Investors who prioritize capital protection often find the Sortino Ratio useful when evaluating mutual funds.
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