Sortin’ out investment programs
Today we wanted to talk about a beautiful addition to the Sharpe ratio - a Sortino ratio.
But you know what? This time we are upping the game a little! We won't only inform you about the basics of choosing the best manager, but we will also vote, whether you want this functionality on the platform!
Even though we already know the results of the vote - because why wouldn't you want some new bells and whistles attached to your platform of choice? - It's still nice to have that very choice.
Another risk-adjusted return measure - the Sortino ratio enters the ring. Many specialists say that this one is much more useful than Sharpe ratio for two reasons:
- It uses downside deviation as the denominator instead of standard deviation because the standard deviation does not discriminate between up and down volatility.
- Also, the Sortino ratio only penalises for “harmful” volatility. The Sortino ratio discards any upside deviation – the “excessive” profit.
Here is the formula:
(Rp – Rf) / σd
Rp = expected portfolio returns
Rf = risk-free interest rate
σd = downside deviation of the portfolio
Without going into further detail, in general the Sortino ratio helps you to determine what is the reason behind a successful manager: smart investments or excessive risks.
If you wanted to see such a ratio on the platform, for example an investment program with a Sortino ratio of 1.53 would probably show better long-term results, than an investment program with a ratio of 0.97.
While it is still a bad idea to completely trust one measuring tool for your investment making sake, when used in conjunction with other measures, the Sortino ratio might help you develop a strategy that matches your risk tolerance and therefore the desired profit rates.
You can read the previous advice right over here, and we will see you next week with another "fishy" risk-return measure contender.
You'll get the "fishy" part next week. See ya!