Sortino ratio (versus Sharpe ratio)

You can download the spreadsheet on our website. The Sortino ratio generalizes (to focus on the downside) from the Sharpe by using:
1. In the numerator, instead of excess return (above riskfree), Sortino uses excess above hurdle (MAR, minimum acceptable return)
2. In the denominator, instead of volatility (annualized standard deviation), Sortino uses downside deviation.

Category:

Education

Tags:

• sortino
• ratio
• Sharpe
• downside
• deviation
• risk-adjusted
• performance
• measure

[cheznikos]

Basically with your way of computing the sortino, it does not matter if the portfolio manager had one really bad day or just many small bad days. that's not right, it should be much better if the PM had many small bad days.

[bionicturtledotcom]

@cheznikos Thanks. 1. It's not my way, it's per GIPS and the correct technical definition; 2. I agree that you have an excellent argument, I halfway come to a similar conclusion, but 3. the weakness in your remedy is: you would treat similarly the manager who underperfomed (e.g) 1% one day, and the manager who underperformed every day

[cheznikos]

sorry annualized would be 0.04%*sqrt(255) = 6.26%, still a too good number

[cheznikos]

Hi, thanks for the video, I'm just not convinced by the 30 denominator at the end to compute the sortino. I think it should be the number of days the return falls short of the MAR.

For example let's say you used 255 daily returns, and you had just one day below the MAR, but that day would be -100%, (-100%)^2 = 1. 1/255 = 0.004 or 0.4% downside deviation, which annualized would be 1.36%. A really good number... despite having a day where you basically lost 100%... that doesn't sound right to me