Retail investors often struggle to select the ‘right’ investment scheme that matches their financial requirements and investing capability. However, with the help of financial ratios like the Sortino ratio, they can evaluate a scheme’s performance in a much better manner.
The Sortino ratio is a statistical tool that proves useful in measuring the performance of an investment for a downward deviation.
This ratio does not account for the volatility in investment.
It helps to represent a realistic idea about the downside risks that accompany a stock or a fund.
In other words, this ratio helps to measure risk-adjusted returns of a particular investment scheme.
The Sortino ratio computed by dividing the difference between the aggregated earnings of an investment portfolio and the risk-free rate of return with the standard deviation of negative earning.
Sortino ratio formula
Sortino ratio = R – Rf /SD
(R): Expected return Rf: Risk-free rate of return
SD: Standard Deviation of the Negative Asset Return.