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Computerized Investing > Second Quarter 2013

The Sortino Ratio

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by CI Staff

In the last couple of installments of Fundamental Focus, we have discussed risk-adjusted performance measures, namely the Sharpe and Treynor ratios (these articles appeared in the Fourth Quarter 2012 and First Quarter 2013 issue, respectively, and are available online at ComputerizedInvesting.com).

Both ratios assess a money manager’s ability to generate excess return per unit of total risk. Where the two ratios differ is in their risk measure. Sharpe’s original work focused on total risk, as measured by historical standard deviation of returns, whereas Treynor used systematic or market risk, as measured by the portfolio’s beta. These articles spurred many reader comments, some of which pointed out that these risk measures handle upside and downside risk equally. However, most investors are only concerned with the downside risk (few will complain if their portfolios are rising in value!).

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