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The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. [1] It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return , while the Sharpe ratio penalizes both upside and downside volatility equally.
For example, when t is close to the risk-free rate, the Sortino Ratio for T-Bill's will be higher than that for the S&P 500, while the Sharpe ratio remains unchanged. In March 2008, researchers at the Queensland Investment Corporation and Queensland University of Technology showed that for skewed return distributions, the Sortino ratio is ...
More formally, then, since everyone holds the risky assets in identical proportions to each other — namely in the proportions given by the tangency portfolio — in market equilibrium the risky assets' prices, and therefore their expected returns, will adjust so that the ratios in the tangency portfolio are the same as the ratios in which the ...
The ex-post Sharpe ratio uses the same equation as the one above but with realized returns of the asset and benchmark rather than expected returns; see the second example below. The information ratio is a generalization of the Sharpe ratio that uses as benchmark some other, typically risky index rather than using risk-free returns.
Under the assumption of normality of returns, an active risk of x per cent would mean that approximately 2/3 of the portfolio's active returns (one standard deviation from the mean) can be expected to fall between +x and -x per cent of the mean excess return and about 95% of the portfolio's active returns (two standard deviations from the mean) can be expected to fall between +2x and -2x per ...
An example of the former would be choosing the proportions placed in equities versus bonds, while an example of the latter would be choosing the proportions of the stock sub-portfolio placed in stocks X, Y, and Z. Equities and bonds have fundamentally different financial characteristics and have different systematic risk and hence can be viewed ...
For example, what does it mean if one investment has a Sharpe ratio of 0.50 and another has a Sharpe ratio of −0.50? How much worse was the second portfolio than the first? These downsides apply to all risk-adjusted return measures that are ratios (e.g., Sortino ratio, Treynor ratio, upside-potential ratio, etc.).
For example, AQR's risk parity fund declined 18% to 19% in 2008 compared with the 22% decline in the Vanguard Balanced Index fund. [42] According to a 2013 Wall Street Journal report the risk parity type of fund offered by hedge funds has "soared in popularity" and "consistently outperformed traditional strategies since the financial crisis ...