The Sortino Ratio In Stock Market Explained 2023 #SortinoRatio #Sortino

The Sortino Ratio In Stock Market Explained 2023 #SortinoRatio #Sortino
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The Sortino Ratio is a measure of the risk-adjusted return of an investment or portfolio, specifically designed to focus on downside risk. It is similar to the Sharpe Ratio but differs in that it only considers the standard deviation of negative returns, also known as downside deviation, as the measure of risk, rather than the total standard deviation used in the Sharpe Ratio. The Sortino Ratio is particularly useful for investors who are more concerned about protecting their investments from losses than maximizing overall returns.The formula for calculating the Sortino Ratio is as follows:
Sortino Ratio = (Portfolio Return - Target Return) / Downside Deviation
Where:
- Portfolio Return is the annual return of the portfolio.
- Target Return is the desired or expected annual return.
- Downside Deviation is the standard deviation of negative returns (returns below the target return).
Interpretation:
- In 2020, the Sortino Ratio is -0.75. This negative value indicates that the portfolio's return is not meeting the target return of 8%, and the downside risk (as measured by downside deviation) is relatively high compared to the excess return. A negative Sortino Ratio suggests that the portfolio's risk-adjusted return is unfavorable in this year.In the other years (2018, 2019, and 2021), the Sortino Ratio is indeterminate (#DIV/0!) because there are no negative returns to calculate downside deviation. This means that there were no instances in these years where the portfolio's returns fell below the target return, so the Sortino Ratio is not applicable.
Overall, the Sortino Ratio provides insight into how well a portfolio is performing relative to a specified target return, while also taking into account the downside risk. A higher Sortino Ratio indicates a better risk-adjusted return, while a negative ratio suggests that the portfolio is not meeting its target return and has a relatively high level of downside risk.

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