**What is the Sortino ratio**

The Sortino ratio **activity is a variation of the sharpe-ratio. **This ratio

**Differentiate harmful volatility from global volatility**using the asset standard deviation of the negative portfolio return (downward deviation) instead of the total standard deviation of the portfolio return. The Sortino ratio

**takes the profitability of an asset or portfolio**, subtracts the risk-free rate, and then

**divide that amount by the downward deviation of the asset**. The ratio is named after Frank A. Sortino.

**What is the Sortino ratio for?**

The Sortino ratio **is a useful way for investors, analysts and portfolio managers to evaluate the profitability of an investment for a given level of bad risk**. Since this ratio uses only the downward deviation as a measure of risk, it solves the problem of using the total risk, or standard deviation, which **It is important because upward volatility is beneficial for investors** and it is not a factor that worries most of them.

**How the Sortino ratio differs from the Sharpe ratio**

The Sortino ratio **improves the Sharpe ratio by isolating downward or negative volatility from total volatility** dividing the excess return by the downward deviation rather than by the total standard deviation of a portfolio or asset. The Sharpe ratio does not favor investment due to good risk, which provides positive returns to investors. However, **It is necessary to determine which ratio to use depending on whether the investor wants to focus on the total deviation or the standard deviation.**, or only in the downward deviation.

**How the Sortino ratio is calculated**

Because the Sortino ratio **focuses only on the negative deviation of a portfolio's return from the mean**, is believed to provide a better view of a portfolio's risk-adjusted returns, as positive volatility is a benefit. The Sortino index **It differs from the Sharpe ratio in that it only considers the standard deviation of the downside risk**, instead of total risk (upside + downside).

**Example of use of the Sortino ratio**

Like the Sharpe ratio, **a higher Sortino ratio result is better**. When examining two similar investments, **an investor will prefer the one with the highest Sortino ratio**, because it means that the investment is generating more profitability per unit of the bad risk it assumes. For example, let's say ETF A has an annualized return of 12% and a downside deviation of 10%. On the other hand, we have an ETF B that has an annualized return of 10% and a downward deviation of 7%. The risk-free rate is 2,5%. **The Sortino ratios of both ETFs would be calculated as follows:**

Although ETF A generates 2% more annualized returns, it is not earning that return as efficiently as ETF B due to its downward deviations. According to this metric, **ETF B is the best investment option**. Although it is common to use the risk-free rate, investors can also use the expected return in the calculations. **For the formulas to be accurate, the investor must be consistent in the type of return they are looking for.**.