The Sortino Ratio is an optimization, or recent modification of the Sharpe ratio that derives risk in its determination of risk-adjusted returns exclusively from potential downside volatility where returns delineate below a specific target or required rate of return. A security, asset, or portfolio’s Sharpe ratio can be calculated by the following formula: Rf - Rp
σp
where Rp is the expected rate of return, Rf is the risk free rate of return, and σp represents the standard deviation of negative asset returns. It is favored among many investment professionals and academics such as professors Kenneth M. Washer and Robert R. Johnson of Creighton University and fund managers like Seth Klarman, Wesley Gray, and Howard Marks.
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